Second-home shopping tips

Second-home purchases are soaring. Our tips can help you get a better buy.

Second-home purchases in the U.S. are at a record high, with 2.82 million second-home sales in 2004, according to the National Association of REALTORS<sup>?/sup> (NAR). In fact, the second-home market is so hot that the NAR offers special training for its members to help buyers find the perfect vacation home. More than half of second-home purchases are intended as vacation properties, but many people purchase for retirement, rental income or as investments.

If you are thinking of purchasing a second home, here are some tips to help you with the practical aspects.

Neighborhood
Take the same things into consideration as you would when buying a primary residence. Is the location desirable and close to amenities you need? Does it meet your list of needs and wants? In addition, you should consider how long you plan to keep the property, and how well it will suit your needs as they change with time. A remote lakeside cabin may be fun if you have a young family, but if you're thinking of retirement, you should probably look for something closer to a town. If possible, spend some time in the community before you purchase.

Financing
Financing a second-home purchase may be a little tougher than buying a first home. Typically, lenders assign a greater degree of risk to a mortgage loan for a second property because it may spread your finances thinner and you could be more likely to default on a second place in troubled times. Lenders may require a larger down payment and charge as much as a half-point more in interest than for a primary home -- as much as two percentage points higher if it is an investment home.

One way to keep costs down is to use a home equity loan on your primary home to help finance your second property. Home equity loans typically carry a lower interest rate than conventional mortgages, and some lenders may loan you up to 125 percent of the appraised value of your home, less existing mortgages.

Home inspection
Don't purchase a second home without having a qualified home inspector look it over. In some vacation areas, termites, carpenter ants, rodents, mildew, leaky roofs, inadequate septic systems and burst pipes from winter freezes are major concerns.

Security, maintenance and insurance
Since you are likely to be away from your second home for long stretches of time, you should take extra security measures. Consider enlisting the services of a local handyman or a neighbor to collect mail, keep an eye on the place and take care of routine maintenance jobs such as leaf and snow removal and mowing the grass. Ask a neighbor or the caretaker to park his or her car at the house occasionally, and use light timers to create the illusion someone is home. An alarm system is a good idea as well.

Premiums for homeowner's insurance are typically higher for second homes, because the chance of a break-in is higher. If fire hydrants and stations are remote, premiums can rise further. And if you rent your second home out, the cost of insurance can rise as much as 20 percent to reflect the increased risk.

If your second property is a condominium, most of your insurance and security needs will be covered by your condo fees. You will still need liability and contents coverage, however.

Tax issues
Taxes for vacation properties can be more complicated than for a primary residence, particularly if you rent the property out for more than two weeks a year. If you do, you are likely to lose any mortgage-interest deduction, and you likely will pay tax on the rental income. However, you may be able to claim some of your repair and maintenance costs as business expenses. Consult a professional tax advisor to find out how tax rules apply to your particular situation.</sup>

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