Buying a second home: What to know and how to do it

Thinking about buying a second home? There could be some perks to having a permanent destination spot or appreciating asset.  

But it’s important for homeowners to consider how managing two properties—and two mortgages—could fit into their lifestyle, budget and long-term financial goals. 

This guide breaks down some key things to know about buying a second home. 

Key takeaways

• It’s helpful to consider the costs related to buying and owning a second home—like utilities, property taxes, mortgage payments, closing costs, homeowners insurance and more.
• The way a second home affects a homeowner’s taxes may depend on whether it’s considered a personal residence or rental property.
• Mortgage requirements could be stricter for a second home than for a first home. 
• Borrowers may need higher credit scores and larger down payments to finance a second home.

A second home is a property someone owns in addition to their primary residence. A person might buy a second property to:

• Enjoy a vacation home
• Have a commuter home for frequent work-related travel
• Give aging parents or college-aged children a place to live 

Investment properties vs. second homes

It’s important to note that investment properties and second homes aren’t the same thing. A second home is one that homeowners live in or visit for part of the year. But an investment property is purchased to make money. 

Investment properties may have unique lending requirements and tax implications. According to the IRS, investment properties may include:

• Homes that are rented out more than 14 days per year 
• Fixer-uppers that are sold for profit 
• Short-term and long-term rentals 

Before purchasing a second home, it may be helpful to speak with a tax adviser. They could review your plans for the new home and help you understand how those plans may affect your tax bill. 

Unless homebuyers plan to pay cash for a second home, they’ll likely need to explore financing options. Keep in mind that investment properties may have different lending requirements than second homes. So it’s best for homebuyers to be transparent with lenders about their plans for the new property. 

Wondering if you can afford to buy a second home? It’s important to think about the potential upfront and long-term costs: 

• Down payment: Lenders may require buyers to make a larger down payment on a second home. 
• Closing costs: Closing costs typically range from 2% to 5% of a home’s purchase price. 
• Interest: Interest rates for second home mortgages are typically higher than those for primary residences. So don’t forget to factor interest into mortgage payment estimates.
• Utilities and maintenance: Monthly utility bills, like those for electricity and water, might add up quickly. Also consider maintenance costs, such as pest control and lawn care. 
• Travel: Depending on distance, you may need to budget for traveling between your primary residence and second home. 
• Insurance policies and premiums: Buyers might need to budget for various insurance-related expenses, such as homeowners insurance, private mortgage insurance and flood insurance. 
• Property taxes: A second home’s mortgage interest and property taxes may be tax deductible. 

Unless a homeowner plans to pay cash for their second property, they’ll likely need to finance the purchase. Keep in mind that lending requirements may be stricter for a second mortgage. And second homes typically aren’t eligible for government-backed options like FHA loans and VA loans.

Some buyers might tap into their first home’s equity to help fund their second property purchase. There are a few ways they could do this: 

• A cash-out refinance: Cash-out refinancing replaces a current home mortgage with a larger one. Homeowners receive the difference in a lump sum payment, which could be used to buy a second home.
• Home equity loans: Homeowners could borrow against their current equity to receive a lump sum of cash at a fixed interest rate. But defaulting on this loan could lead to foreclosure. 
• Home equity line of credit (HELOC): A HELOC lets homeowners borrow against their equity using a secured line of revolving credit. Repayment terms may vary by lender, but HELOCs typically have variable interest rates.

Lenders may see a second mortgage as a bigger financial risk. So even though the mortgage approval process for a second home is no different than that for the first, the requirements may be stricter: 

• Credit score: Lenders may require higher credit scores for a second home mortgage.
• Debt-to-income (DTI) ratio: Borrowers could need a DTI of 45% or less. 
• Down payment: Second home mortgages may require larger down payments—sometimes 10% or more.
• Property type: Some lenders may refuse to finance certain properties, like timeshares.
• Property use: Investment properties could have stricter lending requirements than second homes. Investment property mortgages might have higher interest rates, too. 

Second home mortgages and tax implications

Taking out a mortgage for a second home may offer some tax benefits. But the exact tax implications could depend on whether the IRS classifies the home as a personal residence or a rental property. 

The IRS defines a home that’s rented out 14 or fewer days per year as a personal residence. If a second home qualifies as a personal residence, mortgage interest may be tax deductible. 

If a home is rented out more than 14 days per year, the IRS may consider it an investment property. The IRS typically considers rental income as part of a person’s gross income. But certain rental property expenses could be tax deductible, like repairs, operating costs and more. 

A qualified tax adviser could help homeowners understand the potential tax implications of buying a second home. They may shed some light on local and state tax considerations, too. 

Wondering how to buy a second home? Every homebuyer’s situation is unique. But the process may look very similar to that of a first-time home purchase. You might:

1. Think about why you want to buy a second home and how you’ll use it. 
2. Research different areas and choose your ideal location. 
3. Find a real estate agent in that area who works with second home purchases. 
4. Review all potential costs and how they may affect your budget. 
5. Explore financing options and consider starting the preapproval process.
6. Find your dream second home and submit an offer.
7. Negotiate sale agreement terms, deposit earnest money and complete any contingencies. 
8. Close on the home and receive the keys. 

A second home purchase may have some additional factors to take into account. For example, insurance companies may require homeowners to purchase a separate insurance policy for second homes. 

Homes located in areas with increased natural disaster risks, such as floods or hurricanes, may need additional coverage. It may be a good idea to research local occupancy laws and HOA rules ahead of time, too. 

Working with real estate professionals—like agents, attorneys, lenders and insurance brokers—may help buyers get a sense of the steps involved in purchasing a second home. 

Dreaming of a mountain getaway or a place to rest your head after a long commute? There are many reasons someone may want to buy a second home. But how do you know if it’s the right move for you? 

Before you start house hunting, it’s a good idea to consider how a second property may fit into your current budget. Don’t forget to factor in potential expenses—like homeowners insurance, HOA fees, travel costs and more. 

If you’re set on owning a second home, you could read these tips for raising credit scores, paying off debt and increasing savings.