Financial Facts: Second home or investment property?
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Here in the High Country we have a different mix of homes than most all locations in the country. Take for example the Denver area, there most all homes are primary homes and residents are using them most all of the calendar year. But here more than half of the living units are not occupied full time by the owner. With such a large percentage of the homes not being occupied by the owner as a primary residence, and with many of these homes being rented out the question arises as to how to finance these homes.
The first thing that I need to define is the difference between a second home and an investment property. A second home is one that the buyer intends to use throughout the year for personal use. Now this does not mean that the owner is restricted from allowing non family members from using the property. It also does not mean that the owner is restricted from renting the property when they are not using personally using the property. In fact I would guess that most homes that were financed as a second home are receiving some type of income from rentals.
Now to a mortgage investor an Investment property is one that the primary purpose of the property is to generate income from the property being rented. In addition the intent of the owner is that they do not plan to spend any time using that property for personal use.
So now that we all know the difference between financing a second home and an investment property you need to know why these facts are pertinent. The simple answer is the interest rate a borrower will see when the need a mortgage. Mortgage interest rates for a primary home and a second home are generally the same, interest rates for investment properties are generally higher. The increase in interest rate can be as small as a one quarter point to a full point, depending upon the borrower, the property type and the mortgage program. Keep in mind that there can be numerous variables when pricing out a mortgage for a primary or second home and that there will be many more variables when an investment property is priced.
Now I have simplified the definitions and the details between a second home and an investment property but now you know that there is a difference and that difference can cost you money on a mortgage. As a buyer you need to work in advance with your mortgage lender to know and understand the differences in property types and how that affects the mortgage interest rates and programs available to you. I strongly suggest that you meet with your lender and your accountant prior to looking for a second home or an investment property. An investment of a couple hours now can save you a lot of time and money down the road when the time comes to making an offer to purchase that piece of real estate.
Bob Kieber can be reached at (970) 262-1199 or at email@example.com. He is a local mortgage lender and principal of Resort Lending.
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