When you have a schedule that accommodates staycations far better than vacations, you may be the perfect candidate for a second home in Madison. Think “Lake Mendota” instead of “Lake Como,” and you’ll see where I’m going with this. Not only will you not need to learn to speak Italian, but you’ll be lounging around your lake home instead of spending hours in an airplane.
Many Americans with the means to do so are finding that “getting away” doesn’t have to mean “far away,” according to the Wall Street Journal’s Candace Taylor. The trend toward buying a vacation home in the same general area as the permanent home makes perfect sense to some. “They say the key to relaxation is a change of scenery, even if it’s just a few miles from where they normally live,” Taylor explains.
Think about how Madison is laid out and you may agree. Walk the streets downtown and it’s a completely different story than strolling along the beach at Lake Monona. Let’s take a look at a couple of things to consider if you’re thinking about buying a second home in Madison.
1.Can You Afford a Second Home?
Second homes aren’t just for the wealthy, but they’re not for those on tight budgets either. Keep in mind that it’s not just the purchase price you’ll need to consider but also the carrying costs of a home that you don’t live in full-time. This includes ongoing maintenance and repairs, taxes and insurance.
Those that are less well-off might think about renting the home during the periods they won’t be using it – either short- or long-term. This option, of course, requires that you can charge enough rent to cover the expenses.
2.Qualifying to buy a second home
You’ll need to obtain a mortgage if you won’t be paying cash for the home and qualifying for a second-home loan is more challenging than the one you used when purchasing your current home. For instance, you’ll need a higher credit score to qualify, typically between 725 and 750.
Since second home purchases can’t be financed with an FHA-guaranteed loan, you will need to obtain a conventional mortgage, which means a higher down payment. If your loan is approved to Fannie Mae standards you may be offered the opportunity to pay 10 percent down, but many lenders will ask for 20 to 30 percent. It pays to shop around.
According to the experts at Dow Jones’ Smartmoney.com, the difference between the purchase of an investment property (which your second home may be considered if you plan on renting it out) and a vacation home are quite different. Vacation home purchases are a bit easier because:
- Standards are more lenient for vacation homes than for investment properties
- Down payments are lower – but still not quite as low as they are for a home in which you will live full-time
- Interest rates are more attractive
That said, you will still need to come up with a larger down payment than you would were you purchasing a home you intend to live in – from 20 to 35 percent of the purchase price, depending on the lender.
3.Tax considerations when buying a second home
We always counsel our second-home buyers to meet with their accountants before making the final decision. The IRS treats the deductibility of mortgage interest and taxes differently, depending on whether the home is considered an investment or a vacation home, with the latter presenting the best deduction.
Treated as an investment, however, and the second home presents a different set of problems and benefits. Only a financial professional can help walk you through the various considerations.