What Are Vacation Homes?
Vacation homes are second homes of the owner, which they utilize for recreational purposes. They are separate from the owner’s primary residence, and they often use them during their holidays. Individuals can rent such vacation homes or purchase a separate home. There are several benefits and drawbacks of purchasing vacation homes. Furthermore, if the location of your home is demanding, its price will rise over time. On the other hand, rising interest costs and poor economic progress will lead to falling estate prices.
Benefits of Vacation Homes
There are some major benefits to buying a vacation home.
- If you frequently go on vacation or are fond of taking holidays, purchasing a permanent vacation home is the best option for you. It will save you rental costs, and it may also be possible that the rental you pay is equal to your annual mortgage payments.
- When you’re not at your vacation home, you can make rental income by renting it out to individuals who want to spend quality time at your place.
- A great perk of a vacation home is that your real estate price will increase if your estate is in a demanding location. Moreover, estates in popular vacation areas tend to go up, which can increase the value of your equity.
- Suppose you don’t use your vacation homes for rental purposes. In that case, you are also liable for tax breaks for mortgage payments and interest payments.
Drawbacks of Vacation Homes
Individuals should consider that vacation homes aren’t for everyone, and there are several implications for them.
- Firstly, you should know that vacation homes are expensive. You want to purchase a vacation home in a popular vacation destination. Therefore, due to the factor of location, the price will be quite high. Also, the price may double the amount of your primary home.
- Suppose you’re buying the property on a mortgage loan, then besides mortgage payments. In that case, you’ll have to pay for property tax, insurance, and utility expenses for both your homes.
Vacation homes are also quite difficult to finance. The lenders might demand a higher down payment and charge higher interest rates than your primary home. This is because if you get into financial difficulty, you’ll likely pay for your primary home first rather than a vacation home. Therefore, financing is difficult for vacation homes.
Factors to Consider Before Purchasing Vacation Homes
When you’re going to buy a new property, primarily a vacation home, it is best to consider several factors that can significantly impact your purchasing decision.
You’ll likely purchase a vacation home on a mortgage. Therefore, it is important to check for interest rates because they are the major determinant of demand for the household market. For example, if the interest rate increases, you’ll have to pay more mortgage interest payments. If you choose an adjustable-rate mortgage (ARM), there is a huge risk that your interest rate may increase significantly. Also, lenders offer mortgages at higher payments for vacation homes. Therefore, it is important to consider mortgage rates.
Another important factor to consider is your budget. Will you be able to cover all the hefty costs? Does your income allow you to go ahead with the purchase? If you are affirmative with these questions, you can go ahead. Moreover, suppose your primary home is also on a mortgage. In that case, you have to decide to allocate your income for both the houses. Besides the mortgage cost, you have to look after any maintenance cost, utility expense, and insurance cost.
If your vacation home is your residence, you are eligible for tax breaks and claim homeowner deductions: mortgage interest, real estate taxes, and casualty losses. However, if you rent your property, you’ll have to give tax on rental income, but you can deduct rental expenses from it.
Debt Income Ratio
This is another factor that measures your total debt level against your total income. If it is high, the lender will be reluctant to approve a mortgage because the ratio signifies that you’ll have difficulty paying it.
This factor accounts for your preferences of location and your availability for vacation homes. If you are a busy person and get fewer holidays, it would not be good to purchase an idle vacation home.