Considerations Before Buying a Second Home

Beth Jones & Connie Barr
The Commerce Trust Company

It is estimated that between six and 10 percent of homes in the United States are second homes. If you are considering buying a second home, now could be a good time to take the leap, with interest rates still near historic lows. Here are some common considerations for second-home buyers:

What are some of the pros and cons of a second home?
Barr: A second-home purchase can fulfill a lifelong dream… or become a nightmare. Many buyers can avoid the nightmare scenarios by making a balanced and informed decision.

The downside of buying a vacation home is that you will have two of everything: mortgages, property tax bills, water bills, fuel bills, etc. It also means additional responsibility for repairs and general upkeep.

At the same time, owning a second home can be very rewarding in both tangible and intangible ways. It can be a source of relaxation, or a place to get closer to your family or to engage in your passions or hobbies. It can also generate income if you make it an investment property.

What should a potential second-home buyer consider before making a purchase?
Jones: Think about your goals for the property. Do you want to buy a vacation home that will one day become the place you retire to—and perhaps even pass on to your children? A second home for vacations is very different from an investment property that you buy to generate income. That difference can affect your taxes and the insurance coverage you will need.

Many second-home buyers rent out the property part of the year to offset their expenses. There are different tax rules depending on how much you use the property for personal or rental use. There are many more considerations that are best explored with your accountant or financial advisor.

Good tip. What else?
Jones: Take a look at the numbers. Consider whether you can afford to take on a second mortgage, plus insurance, maintenance, repairs, furnishings and property management fees. Prices can vary greatly by region. Developing communities are less expensive than established vacation hot spots. An experienced real estate professional can help.

What about getting a mortgage on a second home?
Barr: An experienced banker can be invaluable by explaining the costs of purchasing a second home and the loan options available to you. They can look at your current financial situation and the property you want to purchase, and advise you on what type of loan you may be eligible for. A banker can also help you get prequalified or preapproved for a loan before you start looking at properties, so you know what you can afford to buy.

Any final thoughts?
Barr: Before searching for a second home, it is important to clearly define your goals for the home—whether it is a retirement destination, an investment property, or used for other purposes. How much time have you spent there? Will you want to vacation there 10 years from now?

Last, build your team of professionals, including a banker, tax advisor and real estate agent, who can help you navigate the process. Remember that purchasing a second home is a big decision that should be made carefully, and in the context of your total financial life—so be sure to include your financial advisor or planner. iBi

Beth Jones and Connie Barr are Vice Presidents and Private Banking Relationship Managers for The Commerce Trust Company, a division of Commerce Bank.

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