The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This Week’s Question: I was wondering, if I refinance my home this year, will it affect my chances to get a vacation/investment property next year?
Creating a solid base for your financial future starts with the choices you make today. So, pat yourself on the back for getting a head start. In short, refinancing your home should not affect your ability to purchase a new property next year if you can afford it. When you are looking for a second home mortgage, your lenders will focus on your debt-to-income ratio, what type of home is your second home, your credit score, and most importantly, your ability to pay both mortgages.
A vacation home is not an investment property
There is a difference between what makes a home an investment property and what makes it a vacation home. Mortgage lenders and the IRS qualify them differently, and the costs associated with financing each vary as well. And matters can get a bit tricky if you buy a vacation home and plan to rent it occasionally. In very general terms, a home is investment property if your main objective is to generate an income from it, whereas a vacation home is a property you plan to live in for part of the year. However, a vacation home can be considered an investment property if you live in it fewer than 14 days in a year or if it is too close to your home.
The difference between a mortgage for a vacation home and an investment property
You can expect different things from various lenders. However, you should be prepared to pay higher interest rates on an investment property than on a vacation home. Similarly, most lenders would ask for a larger down payment for an investment property than for a vacation home. And, overall, rates for both types of properties are usually higher than for primary residences. Lenders consider second homes to present a higher risk than primary homes, so they not only have higher rates and down payments but also more strict qualifying criteria.
If you are considering buying a new property next year, make sure you thoroughly understand the differences between these types of properties and the tax implications associated with each. You must determine what kind of property you want to purchase so that you strategize accordingly. You have plenty of time to organize your finances and maybe refinancing your home now can reduce your monthly mortgage payment and increase your monthly cash flow. If you need additional help planning for your financial future, talk to a financial counselor today.