Owning a vacation home is a dream that many people have. However, only a small percentage, about 6 percent, of people actually realize that dream. Why don't more people own vacation homes? It often comes down to money. Affording a second home can be challenging for many families. It takes careful planning and smart money management to make it happen. If you want to own a vacation home in the future, now is the time to start planning and saving. The following will give you an idea of how much vacation home you can afford now and may give you an idea of how much money you will need to make your dream a reality in the future.
It's difficult to make another payment on top of your existing mortgage, credit card payments, car loans, student loans, etc. You may think you can pinch pennies and make it work, but the bank won't allow that to happen. Most banks will only extend credit until you achieve a debt-to-income ratio of 36 percent. That means that all of your debt payments must not exceed 36 percent of your income. If you make $100,000 annually, you can only pay out $36,000 per year or $3,000 per month. For this reason, it's a good idea to start paying things off before you shop for a vacation home.
Money for Down Payment
When you buy a home you plan to live in year-round, you can often pay a lower down payment. However, you will have to put the minimum 20 percent down for a second home or vacation property. You may even have to put as much as 50 percent down. The more you have down, the better. If you can make a large down payment, you will have to finance less, which will also help out your debt-to-income ratio.
Maintenance and Other Considerations
Additionally, you should factor in other costs, such as maintenance, utilities, and security. While these costs won't be calculated in your debt-to-income ratio, they will lower your purchasing power when it comes to other things, such as groceries, clothing, and gifts.
If you're not sure how much home you can afford, talk to your real estate agent, mortgage broker, or financial planner. Talking to all three of them isn't a bad idea either. They will be able to help you crunch the numbers and come up with realistic options that fit your dreams and your budget. Keep these things in mind when looking at vacation homes for sale.