Buying a second home

Many people fantasize about buying a getaway. These dreams are particularly common while you’re taking a holiday. Wouldn’t it be nice to have your own second home, and ski or stay at the beach whenever you like, instead of once a year?

Typically, those dreams last about the same length of time it takes to read a few vacationland real estate listings. Where would you come up with the money for the down payment on a second place?

The answer may be waiting for you when you arrive home. You can use the money you’ve invested in your principal residence to finance the purchase of a second, recreational property. With a home equity loan, you can typically access cash equal to 85 percent or more of your home’s paid-up value and use it for a down payment. (Some lenders will advance as much as 125 percent of your home’s appraised value, less mortgages already on the house.) You’ll get a lower rate of interest, because the loan is secured. And the interest you pay on the money may be tax deductible, as long as you meet certain conditions. Be sure to consult your tax advisor.

Still, buying a second home is not a decision you should rush 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 you’d otherwise spend on accommodations and food during holidays and any relevant mortgage-interest tax deduction.

You can 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. You’ll 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:

  • Are you willing to sell one car or trade down to a less expensive vehicle than you currently drive?
  • 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?
  • 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.

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