Weighing the Options: Vacation Home or First Mortgage Payoff?

Weighing the Options: Vacation Home or First Mortgage Payoff?

Have you always wanted to buy a second home in your favorite vacation spot, but you’re not sure if it makes financial sense to take on a second mortgage before paying off your first? It can be a tricky question as it feels like a trade-off between getting what you want now or financial safety and security. Here are four things to consider before you decide.

1. Financial Goals and Stability

Paying off your primary mortgage first will ensure that your home is yours and not at risk if anything should go wrong with your vacation property purchase. Paying it off will free up all that cash that was going to your mortgage and allow you to contribute it to your second home or other investments.

On the other hand, if you are comfortable with your current mortgage payment and have extra income to spare, buying a vacation home now could actually be a smart long-term strategy, especially if you plan to rent it out part of the year. The rental fees could help pay for the second mortgage and the property will likely grow in equity over the years, providing you with a financial windfall if you choose to sell it down the road.

2. Lifestyle and Enjoyment

While buying a vacation home should always pencil out monetarily, there are some people who can handle a little more risk for the sake of maintaining a certain lifestyle. So even if it stretches the budget a bit thin, you may be the kind of person who is willing to live on a tighter budget in order to have a place to make special memories and enjoy your downtime in your favorite location.

3. Investment Potential

Buying a vacation home can be a great investment opportunity. You can have renters help over the cost of the mortgage payment and you’ll likely see a large return on your investment over time. Just make sure you thoroughly research the rental and historic price appreciation trends of the area.

You may also want to consider, though, what kind of profits you could make by investing the money you would have put towards a vacation home into other investments. Are you likely to make more in the stock market once you factor in the cost of down payment, interest rate, monthly payments, taxes, insurance, and maintenance?

4. Tax Implications

There may be tax implications for both options: If you pay off your first mortgage, you will no longer be able to deduct the mortgage interest and it could increase your taxable income. If you buy a vacation home and rent it out at least partially, you may be able to deduct things like the property’s taxes and mortgage interest as business expenses. It’s important to talk to a tax professional about all the ways your decision might affect your tax liability.

Whether you pay off your mortgage first or buy a vacation home first comes down to not only your financial means but also your lifestyle preferences and risk tolerance.

If you're leaning towards buying a second home or a vacation property please give us a call today. We can help you run the numbers to see if it makes sense or not, show you how much you can afford and help you get you pre-approved.

These materials are not from HUD or FHA and were not approved by HUD or a government agency.