Second Homes and Investment Properties – Mortgage Basics

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Mortgages for Second Homes & Investment Properties

The terms “Investment Property” and “Second Home” are sometimes used interchangeably to describe real property that is not an individual’s primary residence. While they do share characteristics there are some important differences worth knowing when it comes to Mortgage Basics.

Investment Properties

An investment property is a property that is:

  • not your primary residence, and
  • purchased or used in order to generate income, profit from appreciation, or to take advantage of certain tax benefits.

Basically, if you purchase real estate that will be used to make a profit, rather than used as a personal residence for you and your family, that property is considered to be investment property.

There are many different types of investment property including:

  • residential rental property
  • commercial property, and
  • property purchased to “flip” (where the buyer purchases property with the goal of reselling it for a profit).

Second Home

Second Homes are normally acquired as vacation homes, however they can also be classified as a home that a borrower only occupies only part-time.  For example, a home used to stay in during a frequent destination for doing business.

Often, to qualify for mortgage on a second-home, the property must be located in a resort or vacation area (such as the mountains or near the ocean) or a certain distance from the borrower’s primary residence.

Second-home loans regularly have a lower interest rate than investment property loans and will usually include a Second Home Rider along with the mortgage. This rider usually states that:

  • the borrower will occupy and only use the property as the borrower’s second home
  • that the property will be kept available for the borrower’s exclusive use and enjoyment at all times
  • the property cannot be subject to any timesharing arrangement or rental pool, and
  • the property cannot be subject to any agreements that require the borrower to rent the property or give a management firm (or any other person) control over the occupancy and use of the property.

If you are considering taking out a loan to purchase either an investment property or second home, make sure you understand the differences between these terms and make your intentions clear to the lender when you start the start the process of applying for the mortgage. This will ensure that you obtain the correct type of loan for the type of property you intend to purchase.

 

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