Buying a Second Home

Determine how you plan to use the house. A second home and a rental property are two separate things. Consider both with the same logical approach you would use to evaluate any investment.

Don't let emotion make your decision. Think about how often you will use the house. Although they often have a bad name, many people find that timeshares can be a cost-efficient alternative for short stays. Also, you can find them on the secondary market for as much as 50% of the direct cost.

Shop when you are most likely to use the house. Get photographs of the home and property during the rest of the year to see what they look like then. In the summer, foliage may serve as a buffer against neighbors who seem too close or not.

Use the best realtor you can find. Well-connected, trustworthy agents know if a mega-mall is coming to town, or if the neighbors regularly throw big parties. A good agent can be invaluable, but it is always wise to get a second opinion from other locals.

Know the hidden costs. How much will you pay for the landscaping, upkeep, caretakers, association dues, garbage collection, insurance, and property or income taxes? People are often surprised by the additional costs that can be associated with owning a second home.

Read back issues of the local newspaper. Check police reports. As a part-time resident, you probably can't vote in local elections, but you'll get property tax bills as if you did. Residential planning and zoning debates could indicate how the town might regard your plans to improve your property. Find out if the locals are receptive to part-time residents. Townies might resent the changes that newcomers bring to the area.

Know how the home fits into your entire financial picture. If you're not paying for the new home in cash, your lender will determine whether the second home is a rental property or a vacation residence. This classification affects your interest rate on a second mortgage. If it's an investment property, be prepared to pay a rate one to two percentage points higher than that for a primary residence. This can change how items such as mortgage interest expenses, maintenance costs, property improvements, depreciation, and rental income can be reported or deducted on your taxes.

Lenders criteria vary greatly; shop around. Some lenders do not finance second homes. Talk first with the lender on your primary residence if you had a good experience with that entity.

Borrowing to buy another home can create complicated tax consequences and affect how much interest on the debt is tax-deductible. Consult with your financial professional, accountant, realtor, and attorney before you sign for a mortgage or on any sale agreements on the proverbial dotted line.