Bruce & Pam Wachter, REALTORS
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Buying a Second Home
But How? It could be that a low-cost* home equity loan can help you turn dreams about owning a White Mountains vacation home into reality.
Many people dream about owning their very own vacation getaway. These dreams usually occur while youre taking a holiday and staying in a motel/hotel or someone elses vacation home. Wouldnt it be nice to have your own second home, and ski or stay in the cool mountains whenever you like, instead of once or maybe twice a year?
Typically, those dreams last about the same length of time it takes to read a few White Mountains real estate publications or checking out MLS listings. Just where would you find the money for the down payment on a second place? Well, the answer is right in front of you when you pull into the driveway of your primary residence. The answer may be waiting for you when you arrive home.
You can use the money youve invested in your principal residence to finance the purchase of a second, recreational property. Buy using a home equity loan, you may be able to access cash equal to 85 percent or more of your homes paid-up value and use it for a down payment. (Some lenders will advance as much as 125 percent of your homes appraised value, less mortgages already on the house.**) You may even be able to lock in a lower rate of interest, because the loan is secured. And the interest you pay on the loan may be tax deductible, as long as you meet certain conditions. Be sure to consult your tax advisor.
But, buying a second home is not a decision you should rush right into. As well as a down payment, you will have to service the additional debt you are taking on and pay other expenses. The total annual cost will include your monthly payments on the home equity loan plus the mortgage, utilities and maintenance on the second property. Assuming you spend all your vacation time at your second home, the net annual cost will be roughly this amount, less what youd otherwise spend on accommodations and food during holidays and any relevant mortgage-interest tax deduction.
You may be able to offset your costs by renting the property out when you are not using it; but you will likely lose your mortgage-interest deduction on the home equity loan and the mortgage on the second home as a result. Youll also have extra maintenance and other costs to contend with.
Unless you have enough income to cover the expenses listed above, you may have to give something up to buy your second home. You may want to consider the following questions:
Do you believe the value of your vacation property will appreciate sufficiently that you can rely on selling it to finance your retirement, and reduce contributions to your tax-assisted savings plan?
Could you share the second home with a sibling or close friends?
Would your grown children foot half the bills in return for using the home, and inheriting a share someday?
If the answer to some of these questions is yes, then you might be able to make that dream vacation home a reality.
*Check in with several lenders.
**Lending practices have tightened up recentlybe cautious