Michael Slate<\/a>, a preferred real estate agent in Palm Springs, California<\/a>, says, \u201cI don\u2019t think anything could be easier than moving into a vacation home on a full-time basis.\u201d He notes that a vacation home, with its fabulous views and relaxing amenities, often provides a fantastic living environment, especially for shelter-in-place or social-distancing situations.<\/p>\n If you\u2019re thinking about making your second home your primary home \u2014\u00a0 temporarily or permanently \u2014 there are a number of considerations to keep in mind before you jump in.<\/p>\n Lenders usually classify homes into three different categories: primary or principal residence, vacation or second home, and investment property<\/a>.<\/p>\n Interest rates and loan-to-value ratios (amounts required as a down payment) for each type of home differ because lenders determine a different assumption of risk based on the owner\u2019s use of the property. Because of this, mortgage loans for homes used as a primary residence generally have better rates than loans for vacation homes and investment properties.<\/p>\n Lenders define a primary residence as the place where you spend the majority of the year. A lender often will ask you to prove your primary residence within 60 days of purchase by providing copies of government-issued identification or tax returns.<\/p>\n Some lenders also want to see that your primary residence is within a reasonable distance from your place of employment, although these standards are changing with the increase in remote work.<\/p>\n Loans on primary residences are the easiest to obtain and maintain. When you\u2019re living in a house as opposed to renting out or visiting occasionally, lenders figure you have more incentive to continue making payments on the loan. It\u2019s a lower risk for them, and thus a better deal for you. Buyers may be able to secure a loan with a down payment<\/a> as low as 3% and an interest rate as low as 2.5% for a primary residence, as of December 2020.<\/p>\n A vacation home or secondary residence refers to a home that you use only sometimes during the year, often for recreational purposes.<\/p>\n For a home to qualify as a vacation home<\/a>, you need to live at the property for part of the year and have exclusive control over it. Some lenders may also require a minimum distance between your vacation home and your primary residence (for example, more than 50 miles) and might look at whether you have a rental, timeshare, or property management contract. If that\u2019s the case, it would classify as an investment property, rather than a secondary residence.<\/p>\n Lenders consider loans on vacation homes to be a higher risk because borrowers are more likely to default on a loan for a secondary residence if they fall on hard times. For that reason, lenders will usually ask for at least 10% to 20% of the purchase price as a down payment, require the borrower to have two months proof of cash or liquid reserves in savings, and charge slightly higher interest rates<\/a> than those available for a primary mortgage loan. As of December 2020, the low end of interest rates for secondary residences was 2.63%.<\/p>\n The decision to refinance<\/a> should be weighed on a case-by-case basis. Since you\u2019ve already made the down payment and proved your cash reserves, the difference really comes down to whether you can get an interest rate that\u2019s low enough to offset the closing costs of refinancing the loan.<\/p>\n Slate also calls out the benefit of refinancing to help offset moving expenses.<\/p>\n \u201cEven if you just refinance and skip those two months\u2019 mortgage payments while they facilitate everything on the back end, that never hurts anything.\u201d<\/p><\/blockquote>\n Since each situation is unique, you should make sure to talk with your lender for more guidance about your personal mortgage situation. But as you consider making your vacation home your primary residence, there are several factors to consider with regard to your mortgage.<\/p>\n In 2019, average interest rates were 3.74%<\/a> for a 30-year fixed rate home loan. In December 2020, the average mortgage interest rate was 2.71%,<\/a> which would gross a savings of nearly $100 per month on a $200,000 loan. With many lenders waiving some or all of the closing fees to refinance, you may come out on top in this current low-interest market. Again, everyone\u2019s loan situation is different, so run the numbers with your lender to see if refinancing is right for you.<\/p>\n As you may be aware, insuring a vacation home is quite costly when compared with insuring a primary residence. Insurance companies consider a vacation home to be a greater risk due to the fact that it remains uninhabited for long periods of time and, as a result, is more susceptible to theft or damage.<\/p>\n Vacation home insurance policies are typically two to three times more expensive<\/a> than primary home insurance policies. Although influential factors vary greatly, a vacation home policy might run anywhere from $2,000 to $3,000 annually, whereas the average primary home insurance policy costs around $1,200<\/a>.<\/p>\n Talk to your insurance agent about reclassifying<\/a> your vacation home as your primary residence for insurance purposes \u2014 you could end up saving thousands!<\/p>\n But keep in mind, if you won\u2019t be selling your current primary residence, insurance costs could go up significantly on that<\/i> property after you transition.<\/p>\n As with anything involving taxes, consulting with your tax professionals to determine what is best for you and your current situation is key. The following ideas can help guide the conversation to see if your vacation home can benefit you from a tax perspective.<\/p>\n Changing your vacation home into a primary residence can also be a great way to save on capital gains taxes<\/a> when you eventually sell the property. Profits made on the sale of a second home are usually subject to capital gains tax up to 20%<\/a>, depending on your tax bracket. But as a general rule, when you sell a primary residence, you do not have to pay capital gains tax on a profit of $250,000 or less ($500,000 for married couples filing jointly).<\/p>\n You must live in the house for at least two of the five years preceding the sale for it to qualify as a primary residence sale \u2014 a rule that could work in your favor if you move to your vacation home!<\/p>\n One important thing to keep in mind: There\u2019s a catch if your home was ever classified as an investment<\/a> property. If you\u2019ve been renting the home out, you could be on the hook for a portion of capital gains tax based on how much time the property was a rental. You may also be charged a flat 25% depreciation recapture tax for the year(s) that you claimed depreciation on your income taxes. Be sure to discuss this with your accountant if you\u2019ve offered the house as a rental.<\/p>\n In some states, changing your vacation home into your primary residence can also save you money on property taxes. For example, in Florida, homeowners are eligible for a homestead<\/a> assessment exemption of up to $50,000 if they can prove the property is their primary residence.<\/p>\n Changing a house from a hangout zone to a real-life home isn\u2019t as simple as you might think. With work, school, and transportation, your vacation home will need to accommodate more than sunscreen and skis now.<\/p>\n Considering you can\u2019t really relax in an unfurnished home, we\u2019re going to assume you\u2019ve got some furniture and decor already waiting for you in your vacation home. But sometimes vacation home furnishings are the equivalent of hand-me-downs \u2014 castoffs from either your primary residence or from the previous owners \u2014 because people don\u2019t want to put \u201cgood\u201d furniture in something that might be rented out.<\/p>\n Moving into your vacation home full time changes the dynamic. You\u2019ll want the things that make you most comfortable for daily life \u2014 and you\u2019ll definitely want the \u201cgood\u201d mattress!<\/p>\n Assess what furnishings are already in the house, and decide what furniture you plan to bring with you. Make a plan for selling or getting rid of the duplicates so you can create a space that feels like home.<\/p>\n Some remote vacation homes rely on well water, septic systems, and generators. This infrastructure might work fine for a couple weeks at a time, but will it hold up to constant use?<\/p>\n If not, look into your options. Is it possible to run municipal water, sewer, and power lines to your location? Or do you need to invest in any upgrades or additional maintenance?<\/p>\n Likewise, think through the size and functionality of the appliances in your vacation home. An apartment-sized fridge might not have been a problem for a short-term stay, but will you need something larger now? What about heating and cooling \u2014 is the system designed to keep you comfortable through every season?<\/p>\n Before moving into your vacation home, Slate recommends making improvements and upgrades that might have been put off.<\/p>\n For example, installing energy-efficient windows<\/a> or insulating your attic may not have previously been a priority, but once you start paying utility bills full time, you\u2019ll wish you had them!<\/p>\n Those intending to work from home will need to think through internet capabilities. After all, shared documents, online conferencing, and connectivity applications form the cornerstone of remote work.<\/p>\n Can your internet handle multiple downloads and run video feeds without glitching? Are you set up for wi-fi that can handle the demands of technology, or will you need to bring a router\/booster with you?<\/p>\n You\u2019ll also want to think through the physical office space<\/a>. If your vacation home doesn\u2019t have a dedicated office<\/a>, where will you set up your work-from-home hub? How will you achieve the privacy you need to conduct business considering the other people in your home?<\/p>\n Remember that a big move can be disruptive to kids, so helping them adjust to their school situation<\/a> in your vacation home is super important. If your child will be schooling remotely, be sure they have a location and setup<\/a> that suits their educational needs.<\/p>\n If you plan to transition to a local in-person school, remember that everything will be unfamiliar to you and your child. You probably never noticed bus stop locations while on vacation! Work together to get things in place to help ease the adjustment.<\/p>\n A lack of conveniences can add charm to some vacation home locations. Who wants to shop at big box stores and eat at chain restaurants on vacation, anyway?<\/p>\n But as you imagine life full time in your vacation location, are there any resources that you might miss? How far are you from the nearest grocery store? Do they have the variety that you need?<\/p>\n If your location lacks some of the conveniences you\u2019ve grown accustomed to, consider alternative solutions. An ebook subscription could replace your local library. A meal plan or grocery delivery service could save drive time if your mega-grocer is further away. And your health insurance provider may have a portal for virtual doctor visits or prescription services, which would help for treatment of more common ailments.<\/p>\n While no one can predict the future, chances are we\u2019ll resume some amount of travel in the months and years to come. And while your employer may accommodate remote work now, some may shift to a more hybrid model as time goes on.<\/p>\n If you do need to return to your office, does your vacation home location allow you the access that you\u2019ll need to airports or highways? If there\u2019s a longer commute involved, is it manageable?<\/p>\n Making your vacation home into your primary home will require official documentation for all of the reasons above: mortgage, insurance, and taxes. The process differs from state to state, but basically, you\u2019ll need to prove that this home is where you\u2019re spending most of your time now.<\/p>\n Utility bills aren\u2019t enough in most cases. After all, you\u2019ve most likely been paying those already, without living in the home full time. To prove residency, you might also need to change the address on your driver\u2019s license or other government ID.<\/p>\n Additionally, you may need to register to vote in your new precinct and obtain a new voter registration card. Tax forms sent to your vacation-turned-primary home may also qualify, as well as school registration forms for your children. Make sure you\u2019re clear about the requirements in your state.<\/p>\n Slate closes with an excellent reminder for homeowners.<\/p>\n \u201cNothing’s forever,\u201d he says. \u201cAs you transition, you don’t have to do it all perfectly. You can learn things as you go, and you can position yourself for settling in. But then, maybe this is just a two-year plan, and you can watch for what to pivot to next.\u201d Primary doesn\u2019t have to be permanent!<\/p>\n Making a move into your vacation home can have great benefits, both from a personal and financial perspective. If you have questions about how this type of move could impact you, find all the answers you need from one of our HomeLight loan officers<\/a> or real estate pros<\/a>.<\/p>\n Header Image Source: (Chastity Cortijo \/ Unsplash)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" After the pandemic, some homeowners are moving to their vacation home. Here are four things to consider before you take the plunge into full-time flip-flops.<\/p>\n","protected":false},"author":145,"featured_media":20963,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","cybocfi_hide_featured_image":"","footnotes":""},"categories":[192,656,654],"tags":[],"class_list":["post-20962","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-for-buyers","category-getting-acclimated","category-homeownership"],"acf":[],"yoast_head":"\n![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2022\/05\/second-home-01-775x1177.jpg\")
<\/a><\/p>\nMortgage considerations<\/h2>\n
Primary residence<\/h4>\n
Vacation home\/secondary residence<\/h4>\n
Refinancing your vacation home as a primary residence<\/h4>\n
\n
Insurance considerations<\/h2>\n
Tax considerations<\/h2>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/vacation-home-couch-666x381.png\")
<\/a>Lifestyle considerations<\/h2>\n
Furnishings<\/h4>\n
Utilities and appliances<\/h4>\n
Efficiency upgrades<\/h4>\n
Office space<\/h4>\n
Schooling<\/h4>\n
Conveniences<\/h4>\n
Future travel<\/h4>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/01\/vacation-home-wallet-666x381.png\")
<\/a>How to prove primary residence<\/h2>\n