We first want to preface this by saying that this isn’t a review of neighborhoods…
When it comes to investment properties and second homes, people generally use these two terms synonymously, when in reality, they are two very different concepts.
A second home is a place where somebody takes up residence for part of the year, such as a vacation property. An investment property is a property that has the sole purpose of generating income for the owner.
If you are looking at mortgages, you will generally find that mortgage providers will offer better terms on a second home than they generally would with an investment property. The most significant among these terms is that of a lower interest rate.
A mortgage for a second home will be based on your personal circumstances and will be very similar to the mortgage on your first home. When it comes to a mortgage on an investment property, the mortgage is generally based on the income that the investment property will generate.
So, now, let’s take a look in more detail at the differences between a second-home vs investment property.
Before we can get to grips with both second homes and investment properties, it is important to have an understanding of how mortgage companies will define your primary residence.
When it comes to mortgage rates, you can be sure that your primary residence will always have the lowest rate available to you.
Your primary residence also does not have to be a house. The residence can be a condo, apartment, or even a houseboat. It doesn’t matter what it is, providing it meets the following criteria:
- It must be conveniently located close to your place of employment.
- You must take up residence here for the majority of the year.
You can only classify a single property as a primary residence, and if you are married, then your spouse must also claim your property as their primary residence.
As we said earlier, a second home is a residential property that is occupied for part of a year. Quite often, a second home is home for vacations like a beach house or a cabin.
From time to time, a second home is not used for holidays but is a residence that a borrower will stay at if they have to conduct out of town business on a regular basis.
When it comes to being eligible for a second home, there are certain requirements that would need to be met. Here is a list of the requirements:
- The home must be occupied by the borrower for part of the year.
- The borrower must have complete control over who stays at or uses the property. The borrower also cannot give a management company control over the property.
- There can be no timeshare arrangement on the property. The borrower must not use the property as part of a rental agreement.
- The home must not have more than a single unit.
- The home must be in a vacation area or sit a certain distance from the primary residence of the borrower.
- The property must be usable for the entirety of the year.
Second-home loans are generally provided at a much lower rate than that of an investment property. That being said, the available rate will depend on factors such as income, assets, credit history, and more.
As a typical rule, when it comes to a second home, a lender will generally allow a lower down payment. Second-home down payments are generally required to be between 10%-20% of the second home’s total purchase price. When looking at investment property loans, this can be slightly higher.
An investment property is a property that is purchased by an investor with the sole intention of making a profit.
Unlike a second home, an investment property will never be lived in by the investor for any amount of time. An investment property, unlike a second home, is generally close to the primary residence of the investor.
Investors keep their investments close, so they are always nearby to take care of the needs of the tenants.
Having a property investment that is far away can eventually spell disaster for investors, and they can usually be forced to hand over control to a property management company that will eat into their profits.
If we look at lenders, investment property loans are often seen as a risk. When it comes to borrowers, they are most likely to walk away from rental properties, and this also means abandoning any outstanding mortgage payments.
To compensate for the heavy risk that is involved with investment properties, lenders will often hike up the interest rates on the mortgages. A lender would also generally be looking for a 25%-30% down payment on the mortgage, which can be a stretch for some.
The logic behind asking investors for a larger down payment is simple: the larger the amount of equity they put into the property, the less likely they are to abandon the mortgage should times get tough.
If you are considering buying, selling, or investing in property, it’s always best to use a trusted resource to help guide you through the process.
If you would like more information on purchasing a second home, contact the experts at Dream Homes by Jen today!