Mountain Mortgage Guy: Is it a vacation home or an investment property? Well, that depends (column)
July 4, 2018
These days, a very high percentage of second-home owners rent out their properties when they are not there and treat them on their taxes as rental properties. This allows the owners to not only enjoy the cash flow to help pay the mortgage but to write off many expenses and depreciate the property and save a bundle on taxes.
When most people buy a second home, they often intend to occupy it as a true second home and have no plans to rent. Therefore, the purchase money mortgage is treated as such and the rate is lower and qualifying is easier, although potential rental income is not factored into the qualifying math.
But many second-home owners have found out that eventually the lure of rental income is irresistible and they start to rent out the place. But when they go to refinance their property, most lenders will now look at the transaction as the refinance of an investment property. The difference is that mortgages on investment properties have a higher rate, reduced loan-to-value and more stringent qualifying criteria than if the property were being treated as a second home.
Typically, the interest rate will be about a half-percent higher and the allowable loan-to-value will be considerably lower. If the borrower is pulling cash out, then the loan to value will generally be limited to as low as 60 percent.
“When most people buy a second home, they often intend to occupy it as a true second home and have no plans to rent. Therefore, the purchase money mortgage is treated as such and the rate is lower and qualifying is easier ...”
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But lately there seem to be a few lenders out there who will allow a second home/investment property refinance to be treated as a second home if the property is listed on the taxes as being available for the owners use at least 60 days per year. Typically these lenders only apply this rule to jumbo loans (more than $625,000).
This has the potential of helping out a lot of owners who otherwise might be stuck with an investment property loan. The 60 days can include days when technically the owner could stay there just because the property was vacant even if the owner was not in town. Obviously, any days on the rental calendar blocked out for maintenance or planned visits by the owner count, as well.
As is the key to so many things in life, planning is the key to it all, and once your taxes are filed, the die is cast. Be sure to discuss with your tax planner if limiting the stated number of days a property is available for rent will have any other adverse implications in terms of limiting your tax deductions, and if so, then weigh the costs on either side of the equation and see what makes the most sense.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related questions from readers. His website and blog can be found at http://www.mtnmortgageguy.com.