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User's Guide To Buying a Second Home: What To Know Before You Buy

By Columns

If you've always dreamed of owning a second home, there are two good reasons to think the time may be right to buy now: Interest rates are still relatively low and property prices, while they have climbed, aren't in the stratosphere. In other words, the stars may be aligned for a purchase, but you'll want to do some considerable analysis before taking the plunge.

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First, the facts. According to the National Association of Realtors, the market was on fire this year, with purchases up 29.7 percent as buyers benefitted from a rising stock market. The median vacation home price was $168,700 in 2013, up 12.5 percent from the year before. Buyers who considered their purchases an investment paid $130,000, up 13 percent from the previous year. 

So, if it's a roaring market, why should you consider buying now? Well, for one thing, the vacation home market is still well below its peak of 2006. And, the market is a tiny slice of the overall housing market. Even so, it makes sense to do the math before you shop. 

Many second homeowners complain they didn't foresee the costs of having a second home. Sure, there's the monthly mortgage, but ongoing expenses can add up, like, upkeep, insurance and possibly hiring a management company or just a trusted caretaker to look in on the property since you won't be there every day. Flood insurance costs need to be taken into consideration for beach and lakefront buyers, and a redrawing of flood maps by the Government may mean higher costs for some.

Also, consider this: If you aren't paying all cash, financial requirements are higher for second homes than first homes. Typically, you'll need to put down a considerable down payment to buy. Some lenders require borrowers put down 25 percent of the purchase price before writing a mortgage for the balance and the median down payment in 2013 was 26 percent. Keep in mind that, 38 percent of second-home buyers will pay all cash. Among investors, that proportion paying all cash was 46 percent.

I also think it makes sense to decide why you are buying the property in the first place. Is this a vacation only getaway for friends and family? An eventual retirement location? Or, do you plan to rent it out, or even buy it, upgrade and sell? Determining your own motivation in buying will help you pick the right location, and ultimately, the right property.

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Every day this week, The Willis Report will be covering some aspect of second home ownership, helping you make the right calculations about where and when to buy and how much to pay.