If you do your homework and make plans ahead of time, buying a second home can be a great investment. But if you're unprepared, it may also lead to financial difficulty. Following are five things to think about before purchasing a second property.

1. What Will You Use It For?

Typically, second homes are utilized as vacation dwellings, second homes for business purposes, or investment assets. Your lender will want to know your plans if you're requesting a loan to purchase a second house.

For instance, because lenders view investment homes as riskier, they are often more difficult to finance. As a result, the interest rate on a mortgage for a vacation home or second home is typically cheaper than that of an investment property.

2. How Will You Finance It?

To buy a second property, the majority of people will have to take out a loan. You have a few alternatives depending on how you want to use your second home. You might be eligible for a standard mortgage, a secondary mortgage, or even a jumbo loan for a second home or vacation property.

As an alternative, you might think about refinancing your present loan. For instance, if you have a sizable amount of equity, you might be eligible for a cash-out refinance or a Home Equity Line of Credit (HELOC). In the latter scenario, you essentially exchange your current mortgage for a new, larger one and receive access to the equity you've accumulated in your primary house. If you have enough home equity, this may enable you to buy your secondary property outright.

3. Do You Have the Funds?

It's crucial to make an accurate budget and make sure you can afford the closing and continuing expenditures of owning a second property, regardless of the financing type you select. Think about the following:

• Down payment: Lenders generally require a down payment of at least 25% for a second home.

• Debt-to-Income (DTI) Ratio Requirements: You’ll typically need a DTI of 43% or lower to qualify for a second mortgage.

• Maintenance costs: You may need to renovate or repair parts of your second home before it can be used.

• Utilities: These aren’t usually high for vacation homes, but if you’re renting your second home out, you’ll need to keep on top of the utilities.

• Insurance: Most lenders will insist you take out comprehensive insurance whether you’re renting or using the second home as a holiday residence.

• Taxes: On top of regular property taxes, you may need to pay a conveyance tax.

• Extras: Think about furnishings and decor, as well as things like HOA fees, if necessary.

4. You Don’t Have To Go It Alone

The cost of a second property is frequently divided between friends and family. This may be a fantastic method to acquire an asset that will benefit everyone while saving money. However, regardless of how close you are, the agreement needs to be viewed as a business one. Otherwise, things may quickly become less convenient and more complicated.

5. Make a Plan for When It’s Not in Use

It is important to have a strategy for what you want to do with your second house when it is not in use, regardless of your plans. For instance, if you intend to rent it out, you should be ready for the possibility that you won't find a tenant right away.

What will happen to the house while you are away if you use it as a vacation home? Can you make it available to other vacationers? Will you be required to work with a management firm to handle tasks like maintenance?

Consider your options, and create a sound strategy.