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Opportunity beckons for second-home buyers

Poonkulali Thangavelu

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."

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.

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.

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