What to Know Before You Buy a Vacation Home or Second Home

Benefits of owning a vacation home.

A vacation home can come with many benefits other than leisure. The homeowner may discover the home is valuable as a rental if the home is in a popular vacation spot, allowing the homeowner to rent the home and earn additional income.

Choosing to lease your vacation home for part of the year can provide ongoing income to offset the cost of owning a home, and may even offer the homeowner certain tax benefits in the form of depreciation expense, mortgage and home equity interest payments and property taxes (restrictions apply). 

Consult a tax advisor for more information about the tax benefits associated with vacation home ownership.

Another benefit of owning a vacation home is property appreciation. Over time, the property value may rise, making the vacation home a smart investment in the long run.

What to know before you purchase a vacation home.

There’s more to purchasing a vacation home than having a place to relax and enjoy life. Whether you ultimately purchase a single family home, townhome or condominium, it’s important to consider the following:

Are you financially ready to take on the additional responsibility of owning a second home?

• Choose whether you will use your second home only as a vacation home, or whether you will rent it out when you are away.
• Consider the possibility that home values may rise and fall. There is a chance that the value of the home may fall.
• Budget for additional expenses besides the monthly mortgage payment, including homeowners association dues, cleaning services, flood insurance and utilities.
• Calculate closing costs and other related expenses such as repairs, cosmetic improvements and home furnishings.

Are you planning to renovate your vacation home?

• Many lenders offer renovation loans, mortgage loans that include some or all of the expected cost of planned renovations.
• Remember to budget for materials as well as labor costs.

Consider whether owning a vacation home is more or less expensive than hotel stays or renting.

Over time, the amount you spend on accommodations may be greater than the cost of owning a home. Deciding to rent a property while you are away is one way to ease the financial burden of owning a second home.

Using your current home’s equity to finance a vacation home.

Current homeowners who have accumulated enough equity in their home may be able to purchase a vacation home outright, avoiding an additional mortgage by getting a home equity loan or line of credit on their first mortgage.

Current homeowners with moderate equity stored in their primary home may be able to reduce the costs associated with purchasing a vacation home by using a home equity loan or line of credit.

For example, existing equity in a primary home may be used to make a down payment of 20 percent to avoid paying private mortgage insurance on the vacation home.

Alternately, the buyer may be able to make a larger down payment by leveraging existing home equity, thereby lowering the monthly mortgage payment on the vacation property.

Often, interest on home-equity financing is tax deductible. Discuss your options with a tax advisor.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.