mortgage

How to buy a second home

If you have been toying with the idea of buying a second home, now could be a good time to take the leap. Interest rates are still low by historic standards, and home prices are recovering from the bust but aren't out of reach.

"What our customers tell us, and what the data tell us, is that for an individual who is well-qualified and who clearly wants to purchase that second home, this is an outstanding time to buy," says Edward Achtner, a Bank of America regional sales executive overseeing the Northern California and Oakland market.

Scouting the market

One way to start off the search for a second home is to find a real estate agent who is familiar with your desired location. This partner could fill you in on aspects such as weather and traffic patterns, help you evaluate the location and amenities of a property and provide information about comparable sales.

And, with an eye to the long-term value of the property, the agent could fill you in on historical prices and how comparable sales have fared, as well as resale prospects. Factors that tend to have a positive impact are proximity to a major metropolitan area, ease of access and availability of four-season amenities.

Gauging your return

With the motivation of quick property flipping largely behind us, second-home buyers nowadays are more geared to enjoying their property rather than looking for a quick return on investment.

"Everybody hopes that properties will appreciate over the course of time," says Bill Banfield, a Quicken Loans vice president. "By and large, though, people want to spend time in that locale and take their families and enjoy it."

Still, you should consider that you will be away from the property much of the time and factor in additional maintenance costs, such as having a management company check for water leaks or frozen pipes.

Insurance considerations

If you are considering a second home on the beach, factor in the cost of flood insurance in addition to your home insurance.

"It is becoming increasingly difficult to obtain flood insurance in coastal communities. And from a cost perspective, it has grown exponentially in some markets," says Bob Cabrera, national consumer lending sales manager with Regions Mortgage.

Achtner cautions that getting insurance for a second home, depending on the location, "may be much more challenging than for a primary residence because of the lack of geographical proximity and the concern of the insurance company that the home will not be properly maintained."

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Mortgage requirements

As for obtaining mortgage financing, lenders look for the same factors as they do for a mortgage on a primary residence. The difference is that you have to qualify for a second-home mortgage in addition to any mortgage debt on your primary home.

Typically, you will need to come up with a down payment of at least 10 percent to 20 percent, meet credit standards and debt-to-income requirements, and provide documents for income and asset verification. If you have a good relationship with the mortgage lender on your primary residence, that might be a good place to start your quest for a second-home mortgage.

Try Bankrate's loan qualification calculator and check mortgage interest rates available in your area.

"It is relatively easy to qualify for a second-home financing," Banfield says. "There is still a 10 percent down financing option. You can even get cash-out on a second home. There is jumbo financing for a second home. It is a very liquid market."

If you are looking to tap into any home equity you have accumulated on your primary residence to fund your second-home purchase, keep in mind that if you need the equity for an emergency situation, you may not be able to access it. Also, the days of leveraging one property to buy another with a minimal down payment are gone.

Tax implications

Take into account the tax implications of your purchase. If you use your home as a true second home, you could get a tax deduction on mortgage interest payments, on the same terms as for your first mortgage, as well as for the property taxes.

If you rent out your second home, you will have to consider additional tax ramifications, particularly if the rental period extends beyond 14 days a year.

Also, in some states, taxes on a second home could be higher if the second home is not assessed on a homestead basis.

Updated: January 10, 2014

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