Is a Second Home the Right Move?

While home buying has been slow in general lately, the market for buying second homes is growing.

More properties on the market, relatively low interest rates and motivated sellers have combined to create an attractive market for those considering a second home.

Middle-class families, especially baby boomers, are increasingly buying second homes to use as vacation retreats or in hopes of benefiting from the appreciation of the property.

Consider these statistics from a 2006 survey by the National Association of Realtors:

• Sales of vacation homes increased nearly 5 percent to a record 1.07 million from 1.02 million in 2005. By contrast, primary residence sales fell 4.1 percent to 4.82 million in 2006, from 5.02 million in 2005.

• The typical buyer of a second home was 44, had a median household $102,000 per year and purchased property that was a median of 215 miles from his or her primary residence.

• About 42 percent of the second homes purchased last year were closer than 100 miles, and 32 percent were 500 miles away or farther.

• 79 percent of buyers said they planned to use their second homes for vacations or as family retreats; 28 percent planned to use their second homes as a primary residence in the future.

Before you buy

Because buying a second home requires a major financial commitment, it’s important to weigh whether a second home purchase is realistic. Don’t make any rash decisions. Instead, think long and hard about how often you will visit and how much time you will spend.

Consider what the price appreciation will be and how much you’ll have to pay each year for the mortgage, homeowners insurance, flood insurance, property taxes, repair and maintenance costs and other fees. Do the math, and then decide whether it's worth the money.

If renting out the property is part of your plan to help cover the costs, keep in mind that managing the property takes a significant amount of time, money and commitment. Being a landlord can quickly become a burden.

Be sure to visit the spot several times, including the off seasons. Consult a real estate agent for market research on how the property is expected to appreciate.

Financing a second home

Today, interest rates for second homes are comparable to those for primary residences. A down payment of at least 20 percent is still best.

The good news is that equity in your primary home can be used for a down payment on a second home. You can do a "cash-out" refinance or get a home equity loan or an equity line of credit to make all or some of the down payment on the second home.

Tax implications

Borrowing to buy a second home involves complex tax implications. Interest is typically tax-deductible, but if you borrow from the equity on your primary residence to make a down payment on the second home, you can write off the interest on only the first $100,000 of equity debt.

If you rent out the second home, you have to spend a certain amount of time in the home every year to be able to deduct the interest. Any profit you make on the property is subject to capital gains unless you sell your primary residence and live in your second home for two years. An accountant can help you fully understand the tax consequences associated with a second home purchase.