Eight questions to ask yourself as you make a decision on a vacation home.<\/p>\n
Have you contemplated buying a vacation home, but you\u2019re just not sure if it\u2019s the right step?<\/p>\n
On one hand, you\u2019d like to own property in your favorite vacation destination. You like the idea of not dealing with the hassle of renting a property or finding a hotel. Perhaps you also have family members who would enjoy using the property.<\/p>\n
On the other hand, you\u2019re not sure if you\u2019d like to take on a second mortgage. You also don\u2019t know what you\u2019d do with the property when it\u2019s vacant. And what type of costs would this incur?<\/p>\n
Ask yourself these eight questions to assess whether buying a vacation home is the right step for you at this time.<\/p>\n
What Are Your Goals for the Home?<\/strong><\/p>\n What is your primary goal for owning a vacation home?<\/p>\n Do you want to use it for just a few weeks during the summer, or do you want the home to be available to all of your family members throughout the year?<\/p>\n Are you willing to list your home as available for other vacation-rental guests? Or would you rather avoid the stress and hassle of owning an out-of-town vacation rental?<\/p>\n Having a vacation home can open several different doors of opportunity. You just need to decide which path is right for you.<\/p>\n Is Your Primary Home Paid Off?<\/strong><\/p>\n Once your primary residence is paid off, owning a vacation home may become more financially viable.<\/p>\n It\u2019s possible, of course, that you might have the funds to qualify for two mortgages. If this is the case, ask yourself if you want the responsibility of paying both bills simultaneously. How will this impact the rest of your budget? Do you have sufficient cash reserves that you could withstand a job loss or other unexpected event without putting yourself at financial risk?<\/p>\n Do You Need Any Other Loans?<\/strong><\/p>\n How will owning two properties affect your debt-to-income ratio? Lenders impose limits on the portion of your monthly income that goes towards paying debts (a measure known as the \u201cback-end ratio\u201d).<\/p>\n While this issue is most commonly discussed in reference to housing, it\u2019s worth noting that many lenders, not just mortgage underwriters, will be looking at your debt-to-income ratio when they\u2019re assessing your worthiness.<\/p>\n If you stretch yourself to the limits of your debt-to-income ratio, you could unintentionally damage your ability to qualify for other loans or credit. This might negatively impact your ability to buy a car or co-sign on private student loans for your children.<\/p>\n Bottom line: make sure you\u2019re maintaining reasonable debt-to-income limits.<\/p>\n Do You Have Reliable Income?<\/strong><\/p>\n Buying a vacation home is a huge investment. How reliable is your income?<\/p>\n Just like with any primary residence purchase, you don\u2019t want to lock yourself into a mortgage if you think there\u2019s a reasonable risk that your job security is shaky or unstable. If your industry is shrinking or your company seems like they might start downsizing, you may want to assess your income stability before purchasing a home.<\/p>\n Do You Have Any Large Looming Bills on the Horizon?<\/strong><\/p>\n If you have big expenses looming on the horizon, such as paying for your child\u2019s college tuition or funding your child\u2019s wedding, make sure that there\u2019s enough space in your budget to cover these bills as well as the cost of your vacation home.<\/p>\n Homeownership comes with many expenses beyond the mortgage. You\u2019ll need to cover repairs, maintenance, and homeowner\u2019s association dues if applicable. Make sure you have disposable income available in a savings account to cover the ancillary costs of homeownership.<\/p>\n How Much Do You Spend on Vacation Rentals?<\/strong><\/p>\n How much money do you currently spend on vacation rentals annually \u2013 and how does that compare to the cost of maintaining a vacation home?<\/p>\n When you purchase a vacation home, your principal repayments plus any market appreciation will contribute to your equity. Meanwhile, your insurance, property tax, interest, repairs and maintenance will be costs.<\/p>\n So the basic question to ask yourself is: which option lets you come out ahead? Is it better to continue renting every year, or is it better to purchase a home, paying the various costs associated with its ownership and maintenance?<\/p>\n The answer to this question will depend on the specifics of your situation, so talk to a real estate agent.<\/p>\n Do You Want the Responsibilities of Homeownership in Two Locations?<\/strong><\/p>\n One home is a lot of work; two homes require double that. Are you willing to take on the task of caring for two homes? If you decide to turn your vacation home into a rental, you\u2019ll need to either bare the responsibilities of management or have the financial resources to hire people to help you.<\/p>\n If you do want to turn the property into a rental home, you\u2019ll need to find a local property manager to represent your home. Ask your real estate agent for recommendations for good local vacation-rental managers.<\/p>\n Do You Know the Area Where You Want to Buy?<\/strong><\/p>\n You\u2019re probably purchasing a vacation home in an area you\u2019ve never lived in before. Make sure that you have a solid understanding of the specifics of that location.<\/p>\n Ideally, you\u2019ll have visited the area several times and know which neighborhoods you would prefer to purchase a home in.<\/p>\n Hire a real estate agent who is an expert in that area. Ask your agent about how factors like weather, holidays, and daily traffic affect the neighborhood. Your agent will be able to provide a pricing history for the area and show you how much comparable properties have recently sold for.<\/p>\n Buying a vacation home is a huge step, both personally and financially, so make sure you work through the details carefully. But once you make a smart investment, you\u2019ll be able to create unforgettable memories for years to come.<\/p>\n