Understanding The Difference Between A Second Home vs. Investment Property

When you talk to people about homes, you’ll often hear various terms thrown around. Your coworker might talk about heading to their vacation home, or your family member might say that their rental property is back on the market. While the difference between a second home and an investment property might seem subtle, understanding how to define your purchase of a house helps you make the right financial decisions.

How Do You Define a Second Home?

For the most part, a second home sounds a lot like what you would expect. This is a type of property that you intend to use as a secondary residence. For example, many older adults choose to own two homes in separate climates that they can go back and forth to during seasonal weather changes. You’ll sometimes hear people refer to this type of property as a vacation home as well, and you can rent it out for short periods of time on occasion. However, your primary purpose for owning the home should be to use it for yourself

How Does an Investment Property Work?

An investment property is one that you plan to use mainly to generate some form of income. You might buy an investment property in your same neighborhood, or your property could be in a completely different state. Since you won’t be living there, your proximity to the location tends to matter less than it would for a second home.

How Is Buying a Second Home or Investment Property Different?

Naturally, the things that you look for in either type of home will be different. With a second home, you might care about the floor plan or whether or not homes for sale in New Castle are located near your favorite venues. With an investment property, you’re going to be looking more at whether or not potential renters will be attracted to the home. You’ll be asking questions such as whether it is near active tourist attractions or located near schools.

The buying process for both a second home and investment property can be somewhat different compared to your first home purchase. You’ll likely face a higher interest rate because lenders view a second home purchase as being riskier since you are already carrying a mortgage. For this same reason, you might also be required to prove that you have cash reserves on hand that you can access to pay the mortgage if you get into a financial bind. Lenders may also request additional information regarding the location and purchase of the home to determine your eligibility for certain types of loans.

Why Does It Matter How Your Home Purchase is Defined?

Lying about the purpose of a home purchase can land you in some serious legal trouble since this could be considered committing fraud. Lenders are aware that some buyers might be tempted to claim that they are buying a second home to reap the financial benefits, and they’ll be less likely to trust you if they hear you use the wrong term.

Knowing how to tell someone what type of property you are planning to buy gives you credibility as a mortgage loan applicant. You can also use your intended purpose for the property to guide your discussions with your real estate agent as you look for the perfect home.