real estate

Should you buy a second home before retiring?

Happy retired couple. Beach front house with wooden walkway.
Highlights
  • It might be good to buy a retirement home now, with low prices and rates.
  • Financing rates and terms vary depending on how the house is used.
  • Anticipate your future needs and limitations when buying a retirement home.

If you have plans to buy a home at the beach, in the mountains or in the desert for your retirement years, you might be tempted to take the plunge and buy your future home now while interest rates and home prices are low.

Financial experts say buying your retirement home five to 10 years before you stop working could be beneficial. However, people in this age group should be aware of the risks of tying up money and perhaps losing flexibility with a second home purchase.

"While there's no denying that we have historically low interest rates and low home values right now, anyone considering buying a second home before they retire needs to run the numbers," says Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif. "People get stars in their eyes sometimes at the prospect of retirement, but the reality is that they may not be able to afford to buy another home right now."

Foss says she recommends clients max out their 401(k)s and make sure they have adequately insured their future before thinking about buying retirement homes.

"I recommend that people have 12 months' (worth) of expenses in the bank as an emergency fund," Foss says. "If they choose to buy another property, they will need extra money to cover those expenses, too. Even if they choose to rent the property for income, they need to have six to 12 months' of upkeep and rental income covered in their savings in case they don't have a renter for a while."

Financing another home before retirement

For 50- and 60-somethings with plenty of discretionary income, buying a home with cash is an option. Others need financing.

There are three basic options for financing a home, says Patrick Cunningham, vice president of Home Savings and Trust Mortgage in Fairfax, Va.

The home can be financed as an owner-occupied home if the buyer lives in it as a primary residence, as a second home or as an investment.

"Second-home financing means that you will need to qualify to pay the mortgage on both your current home and your second home," Cunningham says. "If you need some additional income to qualify for the loan, you can rent the property, and a lender will use some of your rental income for a loan approval."

Cunningham suggests that financing a property as a second home rather than as an investment property is the better option because interest rates, qualification guidelines and down payment requirements are generally more lenient on second homes than on investments. He says an investment loan always requires a down payment of at least 20 percent or 25 percent.

People getting ready to retire might want to consider the benefit of buying homes before they stop working because a mortgage approval could be more difficult to obtain without an income.

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