Are you thinking about buying a vacation or investment home in Albuquerque? What's the difference between the two, and why does it matter?
There are a few differences in mortgage rules for a second home in Albuquerque as compared to your primary home. You should also know the key differences between buying a second home and an investment property, since these terms are often used interchangeably.
What Does "Second Home" Mean?
In addition to your primary residence, a second home is a property that you live in part of the year. A second home is usually a vacation home, but it can also be a place you go for work. Maybe you have a condo in a city where you often work, but it's not your main residence.
Getting a mortgage for a second home usually requires it to either be in a vacation or resort location, or to be at a certain distance from your primary residence.
Loans for second homes usually have lower interest rates than loans for investment properties.
There is also likely to be a Second Home Rider attached to your loan.
Under the rider, you are obligated to occupy and use the property as your second home. There cannot be any agreements requiring you to rent the property or give a management company or third-party control over its use, or the property cannot be part of a rental pool or timeshare.
It is important to note that while this is the general definition a lender might use, every lender will have their own requirements.
For instance, some lenders won't give you a second home loan if you plan to rent out your home. There are others who will give you a loan as long as you are planning to live in the home for a certain number of days every year, even if the house is also going to be rented.
What About Financing An Investment Property?
The financing process for a second home differs from that of an investment property, so understanding the differences is important. A second home is typically easier to finance than an investment property.
Most second home mortgages have rates that are comparable to those for buying a primary home, and credit requirements are similar as well.
Investment property mortgages are harder to qualify for, and the interest rate and origination fees are likely to be higher.
It doesn't mean investment property mortgages aren't beneficial.
You might be able to get a loan more easily if you own an investment property because the property will generate cash flow to cover your loan and other expenses.
What About the IRS?
As far as comparing a second home with an investment property, the IRS has its own guidelines. You can use a property as a second home if you use it at least 14 days each year, or 10% of the time you rent it. It's an investment property if you don't meet that standard.
The question is, why is it important?
Mortgage interest can be deducted from your tax return if you own a second home. Up to $750,000 in qualifying residential debt can be used to offset interest paid.
In the case of an investment property, you can take the same deduction, but you can deduct interest on the mortgage as a rental income expense.
If you own an investment property, you can claim a depreciation expense, which will reduce the amount of your rental income that is taxable. Regardless of how the IRS classifies the home, if you use it and rent it, you have to divide expenses according to when you use it.
Lastly, if you're considering fudging the truth, don't do it. If you aren't honest about your intended use of the property, then it can be considered mortgage fraud, which is illegal.
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