Second Home Mortgage and Tax Deduction Rules

Second Home Mortgage

When buying a second home you do need to be aware of mortgage interest, property taxes, rental income (if renting the home out) and expenses and how they will affect your tax returns. You can trade down to a less expensive home and use the profit to buy a second home. This is a great way to avoid higher taxes or profit and loss taxes on your first home. Second home mortgage interest can be dealt with in the same way as your first mortgage if you are using the home for a place of residence. For example, if you use your second home as a vacation spot. Rules state that you can write off 100 percent of your second home mortgage interest up to $1.1 million.

Shop around for the best home mortgage lenders in order to get paramount financing deals. Compare all costs involved in obtaining a second home mortgage and make sure your lender is up to date on the best rates. You can get mortgage information from thrift institutions, commercial banks, mortgage companies and credit unions. Each institution may have slightly different rates and requirements.

Obtain all important cost information that includes the down payment, monthly payment and interest. Be aware of mortgage rate predictions to determine when the best time to buy a second home is. Mortgage lending rates are determined by global credit demand and dollar denominated debt. Interest rates also adjust for inflation and demand for credit. If you are looking for 30 year fixed mortgage rates, you will be quoted 3.68% and for a jumbo mortgage the rate is 4.25%.* These rates are dependent on down payment, credit scores, and employment history.

A second home mortgage will also be determined by points or fees paid to the lender or broker for the loan and fees such as loan origination, underwriting fees, settlement and closing costs. Negotiate these fees with your lender and determine how they will be paid. Often a lender will “roll” all fees into the loan, but this does increase you principle amount. Determine if you need to pay private mortgage insurance and find the best mortgage insurance companies with the lowest costs. You may need to pay only 5 percent down on a conventional home loan, but you will be required to buy mortgage insurance to protect the lender. This insurance requirement is usually included in the monthly payment.

Once you have determined the best mortgage offer, negotiate for a better deal. Lenders may have different prices and fees for the same loan to different consumers. These different fees are considered commission to the loan officer and can vary according to the second home mortgage amount, the current market trends, and the security of the loan. As you finish out the loan, make sure the interest rate and fees are locked in and no additional fees can be added.

You will need to live in the home for more than fourteen days a year or 10 percent of the days during the year you purchased the second home. Since the IRS language is somewhat vague consult with your tax attorney or accountant to make sure you follow the rules for deducting interest, what constitutes a second home and how long you need to continually live in the home for it to be considered a residence.