Primary residence or vacation home? It’s a matter of interest!

Know the difference before you buy.

The type of property you want to purchase affects your mortgage interest rate. There are three potential classifications for residential property: a primary residence, a secondary residence (vacation home), and an investment property. With beach season upon us, let’s discuss the difference between a primary and secondary residence.

Understanding each classification can help you avoid high interest rates and tax implications* when purchasing additional properties.

Primary residence.

A primary residence is the main home someone inhabits. Your primary property can be an apartment, a houseboat, or another form of property that you live in most of the year.

Primary residences tend to qualify for the lowest mortgage rates. For your home to qualify as your primary property, here are some of the requirements:

  • You must live there most of the year.
  • It must be a convenient distance from your place of employment.
  • You need documentation to prove residency. You can use your voter registration, tax return, etc.

There are some aspects of a primary residence that are tax-deductible. You can also claim your mortgage insurance payments if you purchased your home after 2006. If you choose to include these deductions on your tax return, you will have to itemize your deductions instead of claiming the standard deduction.*

You can classify one property as your primary residence. If you’re married, you and your spouse must claim the same property as your primary home. In addition, once you’ve bought the property, you must occupy it within 60 days following closing. If the loan originates through the VA, and you’re on active duty, your spouse can satisfy the occupancy requirement.

If you plan to turn the property into an investment or rental property within six months of closing, you must classify it as an investment property.

Secondary residence.

When purchasing a vacation home, also known as a second home, you may need a higher credit score to qualify for a mortgage, and you might receive a higher interest rate due to increased risk for the lender. Because you’re not dependent on your second home for a place to live, lenders assume that you may be more likely to stop making payments on the loan if you fall on hard times. Lenders will review your financials and evaluate your loan-to-value ratio, or LTV. Depending on the lender’s LTV requirements, you may need to provide a large down payment, and meet specific cash reserve requirements. Reserve requirements mean you must have enough money in liquid savings to cover the mortgage for a few months if needed. On the other hand, neither of these things may happen – each situation is different.

A second home must have the following characteristics:

  • You must live in the home some part of the year.
  • It must be exclusively under your control and not subject to a rental, time-share, or property management agreement.
  • Other restrictions may apply.

The property must be accessible by car year-round. Although it’s cool, your Dr. Evil-style lair that’s built into the side of a volcano and reachable only by helicopter won’t qualify!

You can rent the home out for up to two weeks each year and keep the income tax-free. If you rent for 15 or more days, you’ll have to report the income, but you may be able to deduct certain things, such as rental expenses. It’s important to note that either your lender or the investor in your mortgage may place special limits on how often you rent the property.

Second homes also qualify for the mortgage interest tax deduction, although if you’re renting out the home, you have to be careful. To qualify for the deduction, you must use the home for more than 14 days or more than 10% of the days when you would normally rent it out, whichever is greater.*

First home, second home – Team Montani is here for you.

If you’re considering any type of home purchase, make your first call to a qualified, reputable home loan officer. Get in touch with Team Montani today so we can help you find the perfect mortgage! Call now for a free lending consultation.

*CrossCountry Mortgage does not provide tax advice. Please contact your tax advisor for any tax-related questions.

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