Cash or Mortgage: Paying for Your Second Home

Understanding the Trend in Second Home Purchases

Buying a second home can be an appealing way to secure a vacation retreat or generate additional income. However, recent trends show that the number of buyers taking out mortgages for second homes has declined significantly. According to industry data, the number of such mortgages dropped to 86,604 in 2024, marking the lowest level since 2018 and far below the peak of 258,289 in 2021. This shift raises questions about the best approach for those considering a second home purchase.

If you have sufficient savings, you may not need a mortgage to make the purchase. All-cash offers are still common and can expedite the transaction while making it more attractive to sellers. However, using up your savings might leave you without a financial cushion, which could be problematic if unexpected expenses arise.

The key decision is whether it makes more sense to pay cash for your second home or finance it with a mortgage. Each option comes with its own set of trade-offs, including flexibility, tax advantages, and long-term costs.

Pros and Cons of Buying a Second Home in Cash

Paying in cash has several clear benefits, but it also has drawbacks. Here’s what to consider before deciding if an all-cash purchase is right for you.

Pros

• No decades-long interest charges: By avoiding a mortgage, you eliminate the possibility of paying interest over the life of the loan. For example, buying a $400,000 second home with a 6.5% interest rate and a 10% down payment would result in a monthly payment of about $2,742. Over 30 years, this would lead to total payments of $819,160, with $459,160 in interest.

• Fewer fees: Paying in cash removes many costs associated with financing, such as loan origination, appraisal, and lender-related closing fees. While you’ll still need to cover standard expenses like title fees, transfer taxes, and insurance, the overall transaction cost is typically lower.

• Outright ownership: A mortgage means your lender technically owns your home until the loan is paid off. Without a mortgage, you own the property in full, giving you more control and flexibility when selling.

• Faster purchase: Sellers often prefer all-cash offers because they don’t have to wait for financial institutions to approve the transaction. This can speed up the process and make you more competitive in a hot market.

• Potential discounts: Some sellers may offer an all-cash discount if you pay for the property outright, as it reduces their administrative burden and potential costs.

• Spending freedom: Without a monthly mortgage payment, you can redirect that money toward other needs or investments.

Cons

• Less cash flexibility: Draining your savings to buy a second home leaves little room for other expenses. Without a financial cushion, you may end up borrowing for emergencies, such as repairs, car maintenance, or health issues.

• Fewer tax benefits: While second homes don’t offer as many tax breaks as primary residences, you can still deduct mortgage interest up to certain limits. If you pay in cash, you lose this benefit.

Pros and Cons of Buying a Second Home with a Mortgage

Not everyone chooses to pay cash for a second home. In some cases, taking out a mortgage may be a better option.

Pros

• More financial wiggle room: Even if you can pay a significant portion of the home purchase in cash, a mortgage provides financial relief in the early months of ownership. This can help cover major repairs or upgrades.

• Tax incentives: You can still take advantage of the mortgage interest deduction on your taxes, even if you’re making monthly payments on a second home.

• Builds creditworthiness: Taking out a mortgage causes a temporary dip in your credit score, but having a home loan on your credit report can improve your creditworthiness in the future.

Cons

• Long-term interest and fees: Mortgages involve paying interest over the life of the loan. While you can pay off the loan early, there may be prepayment penalties if you do so too soon.

• Ongoing monthly payments: Adding another mortgage payment to your budget can be challenging, especially if you already have a first home. You’ll need to ensure you can afford the new payment.

• Longer closing process: The homebuying process with a mortgage can take weeks or even months. You’ll be at the mercy of the financial institution that approves or denies your application.

Deciding How to Fund Your Second Home

If you have the financial means to buy your second home outright, that’s a great way to avoid the long-term costs of a mortgage. You’ll also enjoy the peace of mind that comes with owning the property in full.

However, not everyone has the luxury of being able to pay in cash. Even if you can, a mortgage might still be a smart choice if it helps preserve your savings, allows you to take advantage of tax deductions, or keeps more flexibility in your overall finances. Ultimately, the decision depends on your personal financial situation and goals.