Financing for 2nd home

[Tradingdoc]

How’s everyone doing? I’m hoping for a little insight into 2nd home buying. I am 4 years out of training, wife & 2 toddlers, ~2.1M in assets (1.7M liquid).

We have owned our current place for 2 years. Thoughts have come to sell and purchase a bigger place vs keep and purchase an equal sized additional home (vacation home). Our current home has appreciated 175k over two years.

Assuming we go with the latter, what is the best option for home financing/down payment?

I am almost certain the physician loan would not apply since I already own a current PL mortgage on the primary home. I would prefer not to sell any assets and face STCG or LTCG for the down payment.

Conventional financing to save up 20% down payment (would take about a year with other contributions: 529, etc). Asset backed line of credit? Can I take out a loan based on the equity in my current home?

Am I able to write off property tax/interest on the second home? Does the 10k limit apply for each property or is it a total among both? Is it even worth it to go for a conventional loan if the tax write offs are minimal, assuming an asset backed line of credit presumably has a lower interest rate?

Any insight appreciated. Thanks!

[Ozarka]

I would explore a pledged asset line as you mentioned. Depending on the composition of the $1.7M in liquidity, you could get a decent rate. Also, I believe you can take a equity LOC on your current home for the down payment on the 2nd, but the interest rate on PALs are typically better than on equity LOCs.

The ability to get a PAL will depend on what securities you're holding.

[bovie]

SBLOC is a decent idea, depending on how much you have in your taxable account and what the holdings are.

I would first consider why you are looking to purchase a vacation home and make sure that you truly want it.

Lots of very nice vacations--to a single place, or many different places--can be had for much less money and headache.

[VagabondMD]

It's not what you asked, but @WCI has a general principle that a second home is a luxury item, and, as such, it should be purchased with cash and not financed. I kind of agree with him on this.

[Hank]

$5,000 or $10,000 or $20,000 can get you a good to great house for anywhere from a week to a month on AirBnB. On the beach in San Diego, overlooking the Copacabana in Rio, skiing in Park City or Vail or the Alps, close to the city center in Paris or in Recoleta in Buenos Aires.

Lots of great locations for far better prices than hotel rooms. Personally, I don’t want to have to keep coming back to the same place every time for my vacations, much less have to pay maintenance, worry about burglars, etc.

[Tangler]

It's not what you asked, but @WCI has a general principle that a second home is a luxury item, and, as such, it should be purchased with cash and not financed. I kind of agree with him on this.

I would like to buy a second home at some point. My home boss = wife is wise. She thinks it is a terrible idea (financially).

Is there a rule of thumb you guys think makes sense for a second home?

For example. If you had no debt. net worth of say 5M and a variable household income but last year it was around 400-450, what would be the max cash purchase for a vacation home?

I was thinking max =______ (well, let me see what you guys say, i don't want to bias you with an anchor).

[bovie]

$5,000 or $10,000 or $20,000 can get you a good to great house for anywhere from a week to a month on AirBnB. On the beach in San Diego, overlooking the Copacabana in Rio, skiing in Park City or Vail or the Alps, close to the city center in Paris or in Recoleta in Buenos Aires.

Lots of great locations for far better prices than hotel rooms. Personally, I don’t want to have to keep coming back to the same place every time for my vacations, much less have to pay maintenance, worry about burglars, etc.

Bingo.

[bovie]

I would like to buy a second home at some point. My home boss = wife is wise. She thinks it is a terrible idea (financially).

Is there a rule of thumb you guys think makes sense for a second home?

For example. If you had no debt. net worth of say 5M and a variable household income but last year it was around 400-450, what would be the max cash purchase for a vacation home?

I was thinking max =______ (well, let me see what you guys say, i don't want to bias you with an anchor).

Highly dependent on geography/location, but as a quick and dirty I suppose I’d probably try to keep it under $500k.

Would probably bump this up after NW > $10M.

Personally, I’d prefer a smaller place on some land that’s more remote, something in the woods or on the lake or in the mountains. Makes it easier to keep it cheaper, mostly.

Preferably all three! Rustic.

But then I would no longer have one house and one spouse…

[GIMD]

I would like to buy a second home at some point. My home boss = wife is wise. She thinks it is a terrible idea (financially).

Is there a rule of thumb you guys think makes sense for a second home?

For example. If you had no debt. net worth of say 5M and a variable household income but last year it was around 400-450, what would be the max cash purchase for a vacation home?

I was thinking max =______ (well, let me see what you guys say, i don't want to bias you with an anchor).

I'm not sure why would need to make an all cash purchase. If you are planning to purchase a second home sometime in the future, you can consider buying a home now to capitalize on the low interest rate and rent it out until you are ready to spend time at the second home. Your renters can help pay for part of your mortgage. Just make sure to buy a relatively new home so it would still be in decent shape when you take it over. Minimal work if you find a decent property manager.

[Tangler]

I'm not sure why would need to make an all cash purchase. If you are planning to purchase a second home sometime in the future, you can consider buying a home now to capitalize on the low interest rate and rent it out until you are ready to spend time at the second home. Your renters can help pay for part of your mortgage. Just make sure to buy a relatively new home so it would still be in decent shape when you take it over. Minimal work if you find a decent property manager.

A second home is going to be a consumption item.

Everyone is different, but I prefer cash.

Cash hurts (stings) and makes you careful.

I think many rent out a second home as a rationalization to help them feel less guilty for indulging in an unnecessary consumption item.

Rent might help out but some renters are gross / barbaric, and that makes them less enticing.

Also, it makes way more finacial sense to rent for vacations.

I am trying to recognize reality:

IMO it is not a smart financial move.

I still think it would be cool, but I will not borrow to do it.

[Tangler]

$5,000 or $10,000 or $20,000 can get you a good to great house for anywhere from a week to a month on AirBnB. On the beach in San Diego, overlooking the Copacabana in Rio, skiing in Park City or Vail or the Alps, close to the city center in Paris or in Recoleta in Buenos Aires.

Lots of great locations for far better prices than hotel rooms. Personally, I don’t want to have to keep coming back to the same place every time for my vacations, much less have to pay maintenance, worry about burglars, etc.

This is what my wife says and she is correct.

I am an irrational human. I want a place with land where I can plant trees, bushes, perhaps make a big green house. A place relatively close to our house within driving distance 1-2 hours max. Near great fishing. Remote. Small town.

Consumption item. Will need to save.

[Tangler]

It's not what you asked, but @WCI has a general principle that a second home is a luxury item, and, as such, it should be purchased with cash and not financed. I kind of agree with him on this.

I agree with WCI too.

[Tim]

Tangler , you asked the right questions just not in the right order.

I would like to buy a second home at some point.

Is there a rule of thumb you guys think makes sense for a second home?

My home boss = wife is wise. She thinks it is a terrible idea (financially).

You had the answer already.

[wideopenspaces]

A second home is going to be a consumption item.

Everyone is different, but I prefer cash.

Cash hurts (stings) and makes you careful.

I think many rent out a second home as a rationalization to help them feel less guilty for indulging in an unnecessary consumption item.

Rent might help out but some renters are gross / barbaric, and that makes them less enticing.

Also, it makes way more finacial sense to rent for vacations.

I am trying to recognize reality:

IMO it is not a smart financial move.

I still think it would be cool, but I will not borrow to do it.

Not always just a consumption item. . . We bought a second home ( much like the one you described) about 18 months ago. We do not rent it out. Total price 260k, put 20% down. Current value 650-700k. If we sold it would be super profitable. But of course we love it and have no plans to sell. But our NW is not nearly 5M and we obviously didn't pay cash. Sometimes not following the rules pays off. Plus you have to balance future savings with living life now. Having a second home has been great for a place to get away and spend time with our kids, who are prone to disappearing for days on end with their friends when we're at home.

As to OPs question. The 10k limit is total, not per house. The interest paid does count in itemizing deductions though.

[Tangler]

Not always just a consumption item. . . We bought a second home ( much like the one you described) about 18 months ago. We do not rent it out. Total price 260k, put 20% down. Current value 650-700k. If we sold it would be super profitable. But of course we love it and have no plans to sell. But our NW is not nearly 5M and we obviously didn't pay cash. Sometimes not following the rules pays off. Plus you have to balance future savings with living life now. Having a second home has been great for a place to get away and spend time with our kids, who are prone to disappearing for days on end with their friends when we're at home.

As to OPs question. The 10k limit is total, not per house. The interest paid does count in itemizing deductions though.

You did well. Someone down the street might buy a neighboring house for 700k and then watch it drop to being worth 400k over the next 18mo?

Buying something for 260k (really 0.2 x 260) and then watching it rise to 700k in 18 mo is not exactly guaranteed nor is it likely with these rising interest rates and current home prices (IMO).

I get it. It is a long term decision.

I could buy today and It will "probably" end up appreciating if you hold it long enough but it will have expenses (taxes, insurance, repairs/maintenance) and I will be conservative and just fine waiting.

Who knows, maybe the market will cool? No crystal ball.

When I do it (if I do it) it will be cash and with that thought I kinda hope the interest rates rise to 10%!

I will need to talk my home boss (wife) into it and she hates debt worse than me......which is saying something.