Buying a Vacation Home

Learn all about vacation home financing to secure a private getaway

Some people spend a lifetime dreaming of buying a vacation home. And when they’re finally able to convert that dream to reality, it’s understandable that they might think their only major decision involves mountain retreat versus lakeside cottage. But even before you choose your dream vacation house, you should give some serious thought to how you plan to handle your vacation home financing. Before you submit an offer for a vacation home, make sure you clearly understand your second home financing options, as well as the tax implications of this type of investment.

How do I finance a vacation home if I already have a mortgage?

Many buyers choose to take out a home equity line of credit on their primary residence to finance the purchase of their vacation property. Current tax law encourages this strategy, since the IRS permits you to deduct mortgage interest of up to $1 million in principal on the combined value of your two properties. However, be sure to consult your tax advisor or visit the IRS website for specific details.

Of course, some buyers simply acquire a second mortgage from a lender to serve as their vacation home financing. But remember, if you’re carrying two mortgages, you’ll still need to stay within standard debt-to-income ratios typically used by most lenders. That’s perhaps why many vacation homeowners choose to put a large percentage of their purchase price down in cash.

In years past, lenders typically charged higher interest rates for vacation home loans or loans on secondary properties. That’s generally not the case anymore, although you should expect them to take a close look at whether you’re counting on covering the payments for your vacation home from a stream of rental income (which may or may not ever come) or from your own existing income.

Don’t forget about location, location, location

Experts note that to maintain its ongoing value as a good investment, a vacation property should offer proximity to special attractions, whether that’s a scenic mountain, a lake, ocean or some other recreational venue. Regardless of whether it is a winter getaway or summer destination, it will guarantee additional security in the event you choose to rent the house or need to sell the property. When shopping for properties, it’s a good idea to approach them with renters' needs in mind. Also, in order to ensure a large enough market for renters when you’re not using it, the property should be located within about a three- to four-hour drive of a major metropolitan area.

Some tax implications to keep in mind when buying a vacation home

When running the numbers about the kind of vacation property you can comfortably afford, you’ll first need to know the tax implications of that property. Always consult your tax advisor or the IRS website* for specific details, but you should know that under current tax law:

  • If you rent out your house for 14 days or fewer in any given year, it is considered a personal residence in the eyes of the IRS. That means you won’t need to report that income on your tax return, and you can deduct mortgage interest and property taxes, just as you do on your primary home.
  • If you rent it out for more than 14 days in any one year, you officially become a landlord. You must now carefully allocate your expenses, including mortgage interest and property taxes, between the time you rent it out and the time you use it yourself.

Learn more about how to finance a vacation home

Whether buying a vacation home is in your immediate future or is a long-term goal, make sure you understand your vacation home loan options. Learn more about various Citizens Bank mortgage options and take advantage of our helpful checklists and other tips. Or if you prefer, you can call one of our Citizens Bank home loan originator at 1-888-514-2300.

*This page is intended to provide general tax information for a vacation home. It is not to be used as tax advice and should not be relied upon in the preparation of a tax return. IRS rules and policy nuances may be complex in some areas. Taxpayers should consult with a competent tax advisor or the IRS to determine how their own circumstances are affected.


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