Understanding Different Types Of Properties – When you apply for a mortgage, the purpose for which you are buying the home will affect the interest rate you qualify for and ultimately the mortgage cost. If you are purchasing a second home/vacation home or an investment property, your mortgage will fall under a different pricing category than you would if you were buying a primary residence.Understanding Different Types Of Properties

Understanding Different Types Of Properties

Primary residence

This is your main home and the one you live in for most of each year. A primary residence can be a single-family home, a condo, a 2-4 unit home, or even a houseboat. Mortgage rates and interest rates are lowest for primary homes compared to second homes or investment properties.

You’ll have to attest that the home you are buying is a property you intend to occupy as your primary residence for at least the following 12 months. To qualify, this means you will need to show that:

  1. It is the only primary residence that you (and your spouse) will claim after closing
  2. You will be living there most of the year
  3. The house is a convenient distance from your place of employment, if applicable
  4. The house will be occupied by you (and your spouse) within 60 days of the closing
  5. There isn’t a reason that you would turn the home into an investment or rental property within 12 months of closing

Primary residence-Second Home Tax Deductions

You can deduct a large portion of mortgage interest in home loans for primary residences and private mortgage insurance (PMI) payments for homes purchased after 2006. You’ll have to use itemized deductions instead of claiming the standard deduction on your tax return.

Even if you rent your second home/vacation home occasionally, such as for key weekends for part of the year, as long as it’s less than 14 days a month it’s still considered a vacation residence. More than that, you’re considered to be using the second home as an investment property for most of a season or another uninterrupted part of the year.

You’ll need to talk to an accountant about dividing expenses and tax deductions and accounting for rental income under a rental property designation. Be aware that if you plan on using a property as any sort of investment, you’ll need to wait at least six months after closing to avoid having it classified as an investment property for the purposes of your mortgage and having a higher mortgage and interest rates applied.

Higher Risk

You’ll pay higher interest rates on real estate you buy as a second home or an investment property. Based on the current rate market, you can expect the interest rate to be around a quarter percent higher for a second home, and about a half percent higher for an investment property compared to rates offered for primary residences. This is because lenders know that when someone’s financial situation turns south, they are more likely to bail on a second home or investment property versus their primary residence.

Should you buy a multi-unit property?

A multi-unit property can be a solid investment strategy. You can classify the residence as either an investment property or a primary residence. As long as you occupy one of the units the home would be classified as your primary residence even if you rent out the other units.

Occupation is a great way to strategically purchase a multi-unit building with rental units that will likely cover a majority or all of your mortgage payment allowing you to live rent-free, while also qualifying for interest rates that are applicable to primary residences. This is known as house hacking. As long as you can keep tenants in place, you could even turn a nice profit on your building. Eventually, if you don’t want to make that residence a primary one, you can shift the building over to investment-based property as long as you personally lived there for 12 or more months directly after the purchase.

For more information on different types of properties and or to buy or sell real estate in Southern Utah, contact me!

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