Second Home & Vacation Property: Differences To Keep In Mind

If you are looking for homes for sale in Montgomery County, it is important that you understand how to approach the process depending on if you are wanting a second home or an investment property. While many people use the terms investment property, second home, vacation home, and rental property interchangeably, there are some key differences that need to be explored so that you make the most informed purchasing and financing decisions.

Second Home: A second home is self-explanatory. While this is not your primary house that you call home, it is a property that you use for time away or other practical purposes. Some people will refer to this as a vacation home. Depending on your needs, you may choose to rent this out to others to generate a bit of extra income when you are not using it. However, its primary purpose is not to put extra money into your bank account each month.

Investment Property: Conversely, an investment property is one that you purchase for the purpose of bringing in additional income. Because it is not looked at as a home that you would use for your own lodging needs, the location is inconsequential. The goal of an investment property is to turn a profit. In contrast, a second home has a bigger goal to provide a place to enjoy away from your primary house, making the financial implications less important. With an investment home, you are expected to be a landlord and property manager.

Differences in Financing: Before purchasing a second property, you need to understand the differences in mortgage terms. You should expect to see a higher interest rate for a second property compared to your primary home because of the risk associated with adding another payment to your budget. You may also be required to put down a larger down payment than if you were buying a primary home.

There are also differing tax implications when comparing a second home to an investment property. Those purchasing an investment property will be able to deduct some of the expenses that come with operating a business, giving you a bit of an advantage when it comes time to file your taxes.

Some lenders may require that the second home be located a specific distance from your primary house. This will offer proof that you truly are using it as personal property and not as an income generator. Location is not a factor with an investment property.

Why Understanding the Difference is Important: Because the financing terms and tax implications are different, it is important that you clearly indicate how you plan on using the property. Being misleading about the status of the property in order to gain more favorable financing is considered mortgage fraud. This is a federal offense, meaning that you could land yourself in serious trouble.