How to buy a second home -- Page 2

Ease your doubts
She also recommends that you request photos of the property taken during different seasons. If you go house-hunting in the Hamptons during the winter, neighboring houses might seem too close because of the lack of leaves on the trees. A picture taken during the summer, when you'll spend most of your time there, can allay your fears of being crowded by your neighbors.

Saatchi adds that you should ask around for a trustworthy real estate agent to show you around -- someone who will tell you about the all-night parties that are often held on a particular stretch of beach, or about the next-door neighbors who plan to build a tennis court just a few feet from your bedroom.

Finally, she says, make sure you can get the insurance you need, particularly if you want to buy a home near the beach. "That's a good thing to know -- the availability and cost of insurance -- before you pay for legal fees and inspections," she says.

Financing the deal
OK, you have done the math, looked at year-round photos of the property, and thought it over for a while. You have decided that, yes, you want to buy that cabin in the mountains or that condo on the beach. If you don't have the cash to pay for it outright, the next step is to find a mortgage. The lender or broker who handled the mortgage on your primary home is an excellent place to start if you were satisfied with the service you got.

But you might have to shop around. Different lenders have different standards when it comes to mortgages on vacation homes, as Bill Andrus of Denver has discovered. He owns two condos in major ski areas, and rents them out as much as possible.

"Some lenders won't touch second or third homes, others solicit them, and yet others offer normal rates without the investor penalties, as long as we occupy them sometimes," Andrus says.

Walters says that the loan standards for primary and secondary homes are virtually identical, especially for conventional loans -- in other words, loans for amounts under the jumbo limit (in 2005, that's 359,650). Rates are about the same, unless the lender considers the house an investment property. In that case, expect to pay an interest rate about 1.5 to 2 percentage points higher. As Andrus points out, some lenders might grant a lot of leeway when deciding whether a vacation home is an investment property.

When it's time to make a down payment on your second home, you can use the equity in your primary home. You can either extract the equity by doing a "cash-out" refinance, or by getting a home equity loan or an equity line of credit. You can use that equity to make all or some of the down payment on the second home.

There are complex tax implications to borrowing to buy a second home. Generally speaking, the interest is deductible from federal income taxes. But if you borrow from the equity on your first home 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. Your best bet is to read IRS Publication 936, Home Mortgage Interest Deduction and Publication 527, Residential Rental Property. Once those have confused you, consult an accountant.