How to Buy a Second Home Mortgage?
If you are considering buying a second home in Orange County, California or Georgia, now is definitely the time to buy. Of course, it's important to consider the financial implications and home mortgage rates, as a second home can be an emotional purchase. People are caught up in the rat race, desperately seeking a refuge where they can unwind and forget the workaday world for a few weeks at a time, and they're willing to pay almost anything to get it. Often, those issues can cause financial issues to take a back seat. However, if you're going into it with both eyes open, a good concept of what you can reasonably afford, and home mortgage rates are favorable, a second home could be well within reach.
Financing Vacation Homes
Historically, buyers of vacation homes in Orange County, California have made down payments as high as 50%. Where does the money come from? Often, it's from a home equity credit line taken out on their primary residence. It sounds like a huge outlay, but it comes with a tax benefit - interest on a second home mortgage is deductible on up to a million dollars in principal on both homes combined.
Not that long ago, it was a given that home mortgage rates would be higher on the second home, since lenders felt that the level of risk was increased. Today, however, it's not unusual to get a second home mortgage at the same rate you're paying on your first home. The exception to this is if your second home is considered a rental property, in which case it's likely that the home mortgage rates will be higher.
That doesn't necessarily mean that renting the home out for part of the year is a bad idea. Remember that under the debt-to-income ratio set by Fannie Mae and Freddie Mac, your total debt payments, mortgages included, can't be more than 36% of your gross income. If you're going to rent the place out in Orange County, California, you can include some of the rent to expect to earn when you calculate the ratio.
It gets better for income tax purposes; a vacation home is subject to what's known as the 14 day rule. This means that you're permitted to rent your vacation home for 14 days out of any given year, and you don't have to declare that income on your tax return. Keep in mind, though, that if you rent it for any more than 14 days, the IRS will consider you a landlord, and you'll have to report the income. However, you'll also be able to claim certain expenses that you'll be deemed to incur by virtue of operating and maintaining a rental property.
If you rent the property out for longer than 14 days, you can deduct expenses depending on the term of the rental. If you rent it out for three months out of the year, for example, you can write of one fourth of the mortgage interest, taxes, insurance costs, utilities and repairs against your rental income. The remaining 3/4 of the interest and property taxes can be deducted against your other income by virtue of it serving as a second home for 3/4 of the year.
Other deductions are also available, and your accountant or tax preparer can advise you.