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Buying a Second Home?

Garden in Cosmos For many Americans, owning a vacation home is a long-held dream. If it’s one of your dreams, consider these five factors before you decide to purchase.

  1. Where will the mortgage money come from? Your first financial priority, after meeting your living expenses, should be to build up a rainy day savings of 3-6 months of living expenses and then to fully fund your retirement accounts. If you’ve met those goals, weigh your desire for a second home against the other things you’d like to spend money on.
  2. What is the true, total cost of second home ownership? The costs associated with owning a home go far beyond just the mortgage principal and interest payment. You’ll also have to consider: mortgage closing costs, state and local property taxes, homeowners insurance, private mortgage insurance, homeowners association dues, maintenance, utilities, home security, and furnishings. At the same time, there can be substantial financial benefits to owning a second home, including tax deductions for mortgage interest, property tax, and other homeownership-related expenses.
  3. How does the cost of owning a vacation home compare to the cost of renting a vacation property? Many people who own a second home buy one in a place that they visit frequently. It’s important to consider how often you would actually use the vacation home. For many people, the total cost of owning a second home is much more than renting a home or staying in a hotel every visit.
  4. Will you use the second home as a source of income? Since 1987, the average annual home price increase was 2.8%, just a hair above inflation. So as a pure investment, a second home probably doesn’t make sense. However, if you intend to stay in the home when you vacation or rent it out as a source of income, it can make sense to buy. If you plan to use your second home as a source of income by renting it out, the tax implications may be different than if the home is just a vacation home. Explore those implications with your tax advisor. Also, it’s important to research the rental market in the area you’re considering.
  5. What are prices like in the market(s) you’re considering? Trying to assess whether a home is undervalued or overvalued is difficult. But by researching price trends in the market(s) you’re considering, you can get a sense of whether homes are under or over price trends. If they’re over, now might not be the best time to buy; if prices are below trend, you might be able to get a good deal.

Please call if you’d like to discuss this topic in more detail.

Copyright © Integrated Concepts 2013. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

Photo Credit: Stefan Perneborg via Compfight

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