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Second Home Versus Investment Property: Mortgage Rates And Rules

Second Home Versus Investment Property: Mortgage Rates and Rules

Those with the means to hold properties in addition to the primary residence can take pride in their success. Whether the house is a vacation home, weekend getaway, rental unit, or a hybrid of these, it serves as an asset that will hopefully appreciate into one of superior value. Just as with the primary home, however, additional houses also represent demands for your attention and your money.

Central to the success of such property is making certain that the benefits outweigh the numerous exactions. This begins with the terms of the mortgage, based largely on whether the collateral is a second home or investment property.

Benefits of a Second Home

Even if used exclusively for pleasure, a second home can serve as a sound investment. Eventually, it will be sold and, if fortune is kind and the Realtor is smart, for a higher price than for which it was purchased.

Yet it offers many positives long before resale. Of course, it is a place to which you can escape the grind and change the atmosphere, recharging emotional batteries, and gearing up for future challenges.

In addition, the second home can generate some rental revenue under certain conditions. Meanwhile, it is there for your retirement, saving empty-nesters the trouble of searching for a new house.

Benefits of an Investment Property

Investment properties are purely purposed as income generators and income is available. Many surveys show that millennials and Gen-Zers prefer to rent well into their 30s. As home prices continue to rise in Washington, Idaho, Colorado, and Oregon, leasing becomes a more feasible option for many home seekers.

The income that flows from investment property is largely passive, conditioned on whether the owner prefers to manage the property personally. Like a second home, the value can very well appreciate over time. Also like a second home, there are lucrative tax benefits to owning a house for investment.

How Does Additional Property Save on Taxes?

Just as you can deduct mortgage interest on your primary dwelling from your total income tax obligation, you can do likewise regarding an investment property and second home. Rules state that second home mortgages can not be higher than $1,000,000 and that the residence must not be rented out during the year unless the owner occupies the premises for 14 days longer or 10 percent more, whichever is longer, than the rental period.

Houses for exclusively income purposes offer the mortgage interest deduction as well as taxable income reductions for property taxes, maintenance expenses, and structural improvements. Your lender or IRS.gov can provide further tax-related information.

Where to Find Second Homes and Investment Properties?

Washington

The Rental Housing Association of Washington (RHAWA) compares median sale prices with average salary/wages to conclude that the rental market will thrive for the foreseeable future. Weighing the numbers throughout the state, RHAWA targets Bellevue, Redmond, Kirkland, Renton, and Spokane as the most promising cities in which to invest.

The Evergreen State has no shortage of places to get away from it all. Attractive second home locations include Lake Chelan, Ocean Shores, San Juan Island, Seabrook, and Bainbridge Island.

Oregon

As a state, Oregon has welcomed many new arrivals over the last few years, including a significant number of renters. Real estate investors in the Beaver State consider population growth, job growth, median sales prices, home value appreciation, and average rents when evaluating local communities. Those most promising lately include Bend, OR, long coveted by outdoorsy types.

Other places to consider are Salem, OR, a college town that is second only to Portland in population, and McMinnville, OR, a historic community is best known for its wineries, breweries, and a festival devoted to UFOs. Realtors note that vacation home searches are centering on the Willamette Valley, Mt. Hood, Cannon Beach, and Seaside among the many locales hospitable to second homes and cabins.

Idaho

For the money, property managers still recommend Boise, Idaho as the best place for investors to own rental units. Welcoming a net influx of close to 20,000 people annually, the potential of this capital city has far to go before being realized.

Safe, business-friendly, and sophisticated, Boise offers metropolitan sophistication amidst the most rustic natural beauty in the U.S. Looking at growth, attractions, particularly for millennials, commerce, and culture, these communities are gaining investor interest: East Boise, Meridian, Downtown, and Caldwell. Getaway homes can be found throughout the Gem State in places like Cascade, Idaho Falls, Coeur d’Alene, and Sun Valley.

Colorado

Investor blogs name Colorado as a “landlord-friendly” state. For one thing, it is only one of a handful of states that allow owners to enter a leased building without having to give tenants a full day’s notice. Additionally, the Colorado Association of Realtors observes a drop in home sales and a simultaneous rise in the rental activity.

Many investors find the best cash on cash returns in places like Silver Cliff, Walsenburg, Crawford, and Mead. According to a U.S. News and World Report ranking of the best small towns to get away to, these Rocky Mountain State municipalities make the top 15: Breckenridge, Steamboat Springs, Aspen, and Vail.

Second Home Mortgage Rules and Rates

Doing a side-by-side analysis of interest rates for a primary residence and a second home is instructive. In many situations the rates on second homes are identical to rates for primary residences; however, in some situations, the second home rates are slightly higher, quite understandably, because additional property represents higher risk.

Why? Owning a second home is much less urgent than owning an only home. Therefore, if a payment must be missed, the second home mortgage is more likely to take the hit. Other restrictions often apply. The owner must physically occupy the property for at least a portion of every year.

Furthermore, a second home can not be a multi-unit house or building. Meanwhile, the borrower must exercise sole authority over the property, even if a manager is retained. Down payments are larger, as well, 10 percent or more as a minimum. Finally, the collateral can be neither a timeshare nor a predominantly investment property.

Investment Property Mortgage Rules and Rates

Rates on investment property mortgages are quite a bit higher than those afforded a primary residence mortgage, all other factors being equal. To some degree, the urgency variable works here, too, as with second homes. History proves that more borrowers abandon rental properties, as a business decision when the expenses overwhelm them.

This is because there is no owner-occupancy requirement on such properties. Accordingly, other risk-mitigating guidelines are in place: down payments up to 25 percent of value; higher credit scores; and a demonstration that the house is, or can be, a reliable income producer.

Every Lender is Different

Most banks and finance companies work within the parameters set down by the secondary market entities like FannieMae and FreddieMac. Still, each has its own particular strictures and latitudes when it comes to each individual guideline. This is why setting up a time to talk with a lender representative is so crucial.

Not only can a prospective second home or income property buyer get the latest on interest rates, but this conversation can also enlighten as to whether such financing is doable according to the potential applicant’s financial representations.

View Current Mortgage Rates Oct, 27, Tue, 2020

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