HOW MUCH SECOND HOME CAN YOU AFFORD?
So you have fallen in love with Crested Butte, read a few real estate buyer guides, maybe toured a few properties and are seriously considering a second home purchase. Owning a vacation home in this laid back community like ours should be a joyful experience not one that adds financial worries. How much can you afford to spend without stretching your budget too thin?
If you have just cashed out of another investment and are ready to write a check for your vacation home, you probably already know the answer. Many others may need some help determining their spending ceiling.
One of the first factors that should be addressed is whether or not to rent the property while you are not using it. Your realtor can supply a rental history that shows income and expense data for properties that have been in short term rental pools. Your accountant can explain the pros and cons of owning income property. You may find that the tax benefits and rental income potential may allow you to consider larger or newer properties.
Next you must determine which type of mortgage is right for you. Your options are: Obtaining a single mortgage for your second home or refinancing the mortgage on your first home to cover the costs of both homes by using a home equity loan to make a down payment on the second property. Of course you may be in the enviable position of simply paying cash upfront. If you plan to rent the home out more than 10% of the time, you may be charged a slightly higher origination fee, points and/or interest rate.
Traditionally mortgage lenders gave less favorable terms to second homeowners than they would on one’s primary residence. Their underwriters knew that people were more likely to default on their secondary home loan. Vacation home loans required more money down and carried higher interest rates, and the applicant needed higher credit scores and cash reserves.
Fortunately today there are more flexible products available to the second home buyer. Interest-only loans (in which you make smaller, interest only payments for a set period of years, and then bay back both principal and interest in bigger payments) and “pay option” adjustable-rate mortgages, where you decide the monthly payment form, are offered by most financial institution. It seems like there is a mortgage plan suitable for every financial situation. Take the time to give your lender adequate details regarding your income, expenses, assets and liabilities. Have them run a credit check on you. Find the limit that you are pre-qualified to borrow.
OK you’ve talked to your lender and accountant and you know how much cash you can put down and borrow. Does the property you have been eyeing qualify? If your intended purchase is a condo that allows single night rentals, has front desk check-in service, commercial space on the first floor and large percentage of rental versus owner occupied units, for example, the loan underwriter may consider the complex a “Condo-Hotel” and you may find that your lender backpedaling from the terms he previously quoted. If your dream home is a remote cabin in a pine forest with seasonal access located outside of a fire protection district, your lender and insurance company may get nervous.
We at Prudential Becky Hamlin Realty, Inc. have been selling real estate in Gunnison County since 1980. We recognize “red flags” that might signal potential loan or insurance problems. We are not loan brokers or attorneys, so we are limited as to the advice we offer to our clients. We recommend that you talk to highly qualified experts regarding your second home purchase. If you have a long term relationship with financial institutions, accountants and attorneys in your home town, by all means consult with them. I would however, recommend that you ask them if they are aware of factors that effect our local market. Give us a call if you need a list of names of mortgage lenders and attorneys that specialize in resort real estate and have knowledge of the Crested Butte real estate market.
Tom Filchner
Broker