Information from Your Michigan Bank
Are you counting the days until you can return to one of Michigan’s lakes or your favorite Up North getaway? Having a ‘home away from home’ is a dream within reach with support from your Michigan bank. But preparation is essential to achieving your goal, whether you want a vacation house or an investment property that you can rent when you’re not using it.
Banks in Ann Arbor, Grand Rapids, and Detroit have compiled the advantages and risks of buying a second home, to help make an informed decision.
Advantages of Buying a Second Home
Beyond the clear advantages of having a place to relax, unwind, and have fun, you can also realize some financial benefits from purchasing a second property.
- Real estate can be a solid long-term investment since property values typically appreciate over time.
- Mortgage interest on a second property is deductible, and if your debt threshold crosses $1 million, you can deduct all the interest.
- Property taxes are also deductible.
- If you rent your house for less than 2 weeks annually, the rental income could be tax-free.
A second home or vacation property is the perfect place to make memories with family and friends. It could be a place to live out your retirement years or pass down to your children for future generations to enjoy.
Note: We recommend you speak with a tax professional regarding potential tax deductions.
Key Considerations Before Investing in a Vacation Home or Second Home
Partner with your Michigan bank to ensure you have the financial resources to pay for another property. Your expenses will typically include the following:
- Mortgage Payments. If you can pay for your second home with cash, you'll eliminate the monthly mortgage principal and interest expense. If you decide to borrow funds for the purchase, most banks in Michigan have fixed and adjustable-rate mortgage options.
- Maintenance Funds. Even if you’re not visiting your vacation home every weekend, you’ll still need to pay for taxes, mortgage interest, utilities, and repairs. Banks in Grand Rapids, MI, recommend accumulating 1 percent of your home's value each month to cover these expenses. If your property is worth $400,000, you'll need to save $333 monthly or $4,000 annually.
- Furniture and Living Costs. Transforming your second house into an inviting home means you'll invest in furnishings, appliances, and housewares like dishes and bedding. Depending on your style and budget, you could spend thousands to make your new home comfortable for you and your guests.
Is Now the Right Time to Buy a Second Home?
Your Michigan bank or financial advisor can help assess your situation, but the following questions can guide the timing of your purchase:
- How much are you saving for retirement? If you're tucking away between 10 and 15 percent of your income without constraining your lifestyle, paying for a second property may be feasible.
- How large is your emergency cash fund? Banks in Ann Arbor recommend a 6-to-9-month reserve to ensure your financial stability.
- How much credit card debt do you carry? If your debt-to-income (DTI) ratio is above 35 percent, meaning you rely on more than one-third of your income to pay creditors, you may want to delay your second home purchase. Taking on the additional debt will diminish your enjoyment of your vacation home.
- Do you own your primary residence? If your current home doesn’t have a mortgage, you’ll have more financial flexibility to pay for a second property.
- And if you have children, have you established college funds for them? With financial support in place for education, you’ll have peace of mind that a second home won’t detract from your child’s future.
Connect with the team at Level One Bank to talk about your plans for a vacation property or second home. We’re here to help you reach your goals!
My second home is beaches where I could find my ‘happy me.’