If you are already a happy homeowner, there may be a variety of reasons that you feel you’re ready to own a second home. Maybe you want another dwelling as an income property, a vacation home, a retirement residence, or you simply want to make an investment in your future. Whatever your reasons, it’s important to evaluate your financial situation thoroughly to determine if you can truly afford a second home and still maintain your normal lifestyle. If owning a second home will put undue financial stress on you, it may not be the right choice at this time. But if it won’t, it can lead to an exciting new chapter in your life.
Below are the top five ways to determine if you have enough money to afford a second home:
1.) Do you have enough liquidity for a down payment?
If you plan on financing your second home, take stock of how much cash you have in the bank or how much you have in very liquid assets. While the bank may not require you to put 20 percent down for your second home, you should plan on putting at least 20 to 30 percent down. Not only will this help you to avoid a monthly private mortgage insurance (PMI) payment, but you’ll also have lower monthly premiums and may get a lower interest rate that will save you money over the life of the loan.
2.) How much debt do you currently have?
Determine how much total debt you currently have, which would include car payments, student loans, credit card debt and any balance that is currently remaining on your current home. If a new mortgage for a second home will increase your total debt to more than 36 percent of your income, you should consider waiting until more of your current debt is paid off. Banks may offer you the option of borrowing against the equity of your primary home for the second home’s loan, but this generally isn’t a good idea or a viable option if the home isn’t worth substantially more than you owe.
3.) Can you handle the new monthly payments?
Make a list of your current monthly expenses, including expenses such as your mortgage, car insurance payment, credit card bills, electricity, phone bills, internet bills, etc. Now add another mortgage payment, including taxes, insurance, and interest to this number. If the total number is more than 30 percent of your take home pay each month, you may not be able to handle the extra financial burden of a second home.
4.) How stable is your current income?
Do you work for a stable company? Has there been a lot of turnover? Are you considering changing jobs? Are you considering going to work for yourself? Is your monthly income steady or sporadic? Determining if you can afford a second home will depend largely on how stable your line of monthly income is. Another home will mean you need to be in a good financial situation for at least the next 15 years.
5.) Will you be renting out the second home?
If you buy a second home and plan to use it as a revenue generating property, either as a vacation rental or as a 12-month lease, you should assume you will receive zero income from the property. This is a safety precaution. Relying on rental income to pay your mortgage can be a tricky proposition. You may get late payments, delinquent tenants, or you simply might have a hard time finding renters if the market is down.
Let the experts at Northrop Team help determine if a second home is right for you