With a humid mid-Atlantic summer in full swing, many Marylanders are entertaining the idea of purchasing a vacation home. That might be wise — it can be a great place to rejuvenate and spend time with family and friends.
However, a vacation property also comes with its own set of challenges and those considering a purchase should be aware of them. With that in mind, here are six important questions to ask before making the move.
1. Will the vacation home be mortgaged?
If you’re not going to purchase the home outright, you’re probably thinking about a mortgage. If that’s the case, you should know that there are generally more stringent requirements for a second mortgage, and you may need to put more money down than you would if you were getting a first mortgage.
2. Do you have enough money to put down to avoid private mortgage insurance?
If your down payment on a new home is less than 20% of the cost, you will have to pay for private mortgage insurance (PMI). Insurance fees run between 0.3% to close to 1.5%, depending on your down payment and credit score.
3. Have you seriously considered the upkeep costs?
Like your primary residence, a vacation home requires upkeep. A good rule of thumb for general maintenance costs is 1% of the purchase price per year.
Of course, you must also factor in utilities. Even though the home would only be occupied for a portion of the year, some utility expenses (water/gas/electric) can be comparable, whether the home is being lived in or not (this depends on location). For example, a home needs air circulation throughout the year to prevent mold, and pipes must be kept minimally warm in the winter to avoid freezing.
When it comes to cable/satellite/Internet costs, you can always opt for seasonal billing (if it’s available). With that, you have a wider selection of channels in those months when you’re in residence and a much reduced (and less expensive) lineup when you’re not. This is worth investigating, since you don’t want to pay for services you’re not going to be there to enjoy.
4. How much will extra insurance cost?
Since you’re insuring a second home, you may need an additional policy to cover it. If your new home is in a coastal area, you might also need flood insurance (if it’s available in that area).
5. Have you priced out a security system or service?
Because vacation homes are empty for much of the year, they can be popular targets for thieves. If you store any valuables there — computers, televisions, expensive kitchen items, recreational equipment, etc. — it might make sense to invest in a security system or service. That could give you peace of mind during the off season.
6. What will you be paying in new taxes (property and otherwise)?
Your vacation home may very likely be in a different state, with a different tax code. Have you checked to see how tax friendly that new state is? What will you be paying in property taxes (if anything)? And do you intend to rent your home out in the off-season? If so, you may have to report and pay taxes on it.
A vacation home can be a great purchase for a family, but make sure you’ve considered all the costs and ramifications first. Talk to your financial adviser about financing options and how much you can afford for a down payment without negatively affecting your financial future.
Mike Hamolia, CFP, is a wealth manager at Pinnacle Advisory Group, in Columbia. He can be contacted at 410-995-6630 and [email protected].