Four Financial Tips for Buying a Second Home
Second homes are becoming more expensive, and house hunters should examine interest rates, upfront fees, maintenance charges and taxes when calculating the cost.
By Gregory Schmidt, Published March 17, 2022, Reprinted from The New York Times
Demand for second homes has ramped up in the last couple of years as affluent Americans fled dense cities for more elbow room and a better view.
“The demand for second — or third — homes is out of this world,” said a real estate broker of luxury homes in South Florida for Douglas Elliman.
Seventy percent of respondents in a 2021 national survey said they were interested in a second home or already owned one, up from about 60 percent the year before, according to RCLCO, a real estate advisory firm that conducted the survey.
“We have seen some interesting changes, especially among millennials in their 30s and 40s, who have been gaining a lot of wealth,” said a principal at RCLCO. “The rise of remote work changed the calculus for a lot of families for the ability to live somewhere else for parts of the year.”
Favorite Second-Home States
Florida and California top the list of the states most preferred for second homes, according to a survey from a real estate consulting firm.
1. Florida
2. California
3. Texas
4. New York
5. North Carolina
6. Colorado
7. Arizona
8. Georgia
9. Hawaii
10. South Carolina
11. Virginia
12. New Jersey
13. Pennsylvania
14. Washington
15. Massachusetts
Source: RCLCO
By The New York Times
But costs for buying a second home are going up this year, which could cool the red-hot market. On Wednesday, the Federal Reserve increased its key interest rate by a quarter of a percentage point, and the Federal Housing Finance Agency has said it will raise upfront fees on second homes.
Second homes are typically used only a few months out of the year, so it’s crucial for buyers to consider the costs before signing a contract, real estate experts say. Some states, like Florida, have a waiting period after a contract is signed, giving buyers additional time to do their due diligence, but it’s important to research the market before starting the hunt for a home.
Here are four tips to help navigate the costs of buying a second home.
LOCK IN A MORTGAGE RATE
Mortgage rates fluctuate daily, but they are on the rise. The Federal Reserve has projected six more rate increases this year, making borrowing more expensive for banks, which then pass on the higher costs to customers. Mortgage rates are also affected by inflation, which is at a 40-year high. To protect yourself from higher mortgage rates later, set your rate as early as possible.
Buyers relying on financing should line up their loan approval well before making an offer on a home, said the Douglas Elliman broker. “A home buyer in the market today can get a 90-day rate lock,” he said.
In an effort to tamp down soaring inflation, the Fed also said it would begin to shrink its balance sheet of bond holdings, which could tighten bank lending for mortgages and other loans.
The average rate for a 30-year fixed-rate mortgage was 4.16 percent on March 17, up from 3.09 percent a year ago, according to Freddie Mac, the mortgage finance giant. Want to know the rate you might get? The Consumer Financial Protection Bureau has a handy online tool to help potential home buyers determine what mortgage rate they can expect in every state.
NEGOTIATE CLOSING COSTS
Mortgages typically come with upfront costs, including appraisal fees and pro rata property taxes. Most are standard, but buyers looking to reduce their closing costs can negotiate some fees with lenders on third-party services, like pest inspections.
One upfront cost is about to jump: The Federal Housing Finance Agency said in January that, in an effort to support affordable housing, it would increase the upfront fees next month for mortgages on a second home sold to Fannie Mae and Freddie Mac by as much as 3.9 percent.
Under the plan, a buyer with a $300,000 mortgage and loan-to-value ratio of 65 percent, for example, will pay an additional $4,875, according to the National Association of Home Builders, which has opposed the plan, saying it will increase the cost of homeownership.
SCRUTINIZE MAINTENANCE FEES
Condos and other planned developments typically have a homeowners association that maintains the finances of the community through monthly maintenance fees, which are often based on the size of the complex and the type of amenities that are covered. Banks will consider HOA fees when determining the size of a mortgage, so higher fees could leave a borrower with a smaller loan.
Buyers should find out what the fees are and whether the association has money stashed in a rainy-day fund, said the broker at Douglas Elliman. And they should get disclosures of any upcoming assessments, he added.
“They want to look at reserves to make sure there is money in the bank in case there is unseen maintenance,” he said. “They don’t want to get whacked with an assessment.”
TAKE ADVANTAGE OF TAX BREAKS
Tax breaks are available to homeowners, including deductions for property taxes and interest on mortgage payments, if their second home is intended for personal use.
To help defray the costs of maintaining a second home, though, some owners might rent out the property, especially if they are planning to live there later, said Henry J. Grzes, lead manager for tax practice and ethics with the American Institute of Certified Public Accountants.
Owners of investment properties qualify for other tax breaks, including deductions for maintenance and depreciation, according to the I.R.S. “You are allowed to deduct up to $25,000 in losses in any year,” he said.
Other tax savings are available to owners who qualify for discounts. “Pay your tax bill early,” he said, “and look at things like enhancements to your utilities through energy credits like solar.”
