You’ve decided to dive in and buy your dream house on the lake, but how do you finance this life changing decision? From vacation rental income to second home mortgages, you have many options when it comes to affording your lake house in 2020.
Here are some tips to make buying a lake house a sound financial decision.
Finance during a year of stability.
The real estate market experienced a year of declining interest rates in 2019. With few economic risks and low inflation, borrowing costs are expected to remain low, making 2020 a great year to take on debt for a long-term purchase.
According to Bankrate, the rate on a 30 year note fell from an average of 4.68% at the beginning of January 2019 all the way down to 3.9% by Christmas. This is really good news for homebuyers.
The lakefront real estate market ended on high note in 2019, with average sales price for lakefront homes projected to continue increasing this year. If you haven’t read our analysis of last year’s lakefront market, start hereand learn why 2020 is the year to finance your lake house.
Consider your use and classify appropriately.
When financing your lake house, you will need to classify your property based on how it will be used. Typically your lake house will fall into one of three categories for financing: primary residence, secondary residence, or investment property. The type of home you buy will affect your interest rate and may require you to have a higher credit score.
Secondary Residence vs. Investment Property
If you plan to use your home as a short-term rental, you can still classify the property as a secondary residence instead of an investment property, taking advantage of lower interest rates and qualifying for mortgage interest tax deductions. This will vary by lender, but typically your lake house can remain a secondary residence if your home is rented no more than 180 days a year and you occupy the home at least 10% of the time you would rent it. You will have to report rental income on your taxes if you rent for 15 or more days. Learn more about mortgage classification here.
Look for niche lending options.
With vacation rentals gaining popularity over the last few years, most lenders should have a base level of knowledge when it comes to financing your lake house for short-term rental use. If possible, seek out a finance professional familiar with the vacation rental industry. You lakefront sales specialist may have recommendations for you.
If you don’t intend to rent out your lake house, there are plenty of lending options to meet you where you are financially. Many banks, such as M&T, offer bridge loans to help you purchase a new home before your existing home sells. You can also tap into the equity of your primary home to fund the down payment for your second home (cash-out refinance). Learn more about your lending options here.
Determine your Vacation Rental Income Goals
If your lake house is a second home or investment property, vacation rental income could factor into what kind of lake house you can afford. Your rental rate is determined by the number of bedrooms, bathrooms, amenities, and updates your home has. The larger and more modern the house, the higher the sales price – but also consider that you’ll most likely be able to rent it out more often and for a higher rate.
Our real estate team can provide a vacation rental income analysis for any lakefront home in the Finger Lakes. We provide income projections for the lake houses you’re considering and you can compare side by side how much each will earn, making it easy to determine the level of financing you’ll need.
Consider the extra costs.
Your lake house will incur higher costs than a traditional or primary home. Here are a few expenses to budget for when determining how much lake house you can afford:
Flood Insurance
Being so close to the water might warrant purchasing flood insurance. Though not required by New York State, your mortgage lender may mandate that you purchase a policy in addition to homeowners insurance. Flood damage isn’t typically covered by homeowners insurance and less than 50% of flooding incidents are covered by federal disaster assistance.
Maintenance
You’ll likely need a larger maintenance budget for your lake house, especially if it’s a second home or investment property. Lakefront property components, such as docks, decks, boathouses and beachfronts, will need routine maintenance, pressure washing, replacement, clean up, and more.
If your lake house is a secondary residence or investment property, consider hiring a management company to perform these tasks for you. In addition, property managers having a year-round presence at your home can reduce the chances of a break-in and quickly address storm damage or pests to avoid long-term issues and higher costs later on.
Lifestyle
There’s a reason you’re buying a lake house – you want the lake lifestyle! You’ll want to set aside some funds to buy that boat you’ve always wanted, and don’t be surprised when the family asks for a couple kayaks and a jet ski! Prioritize which gear you’ll need once the house is yours – and plan for more fun purchases later on.
What’s the best thing you can do when purchasing your lake house? Work with a professional that specializes in lakefront real estate. With 95% of our sales being on the water, our team is ready and excited to answer your questions and find the right lake house for you! Call us today (855) 683-8429.
