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What to Know Before Buying a Vacation Home

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Home prices are rising nationwide, but prices in many vacation spots are lagging. That’s great news for buyers who are in a position to buy a vacation home while interest rates are low.

Second homes are an affordable luxury

The main reason vacation spot real estate markets aren’t recovering as quickly as other areas is that second homes are a luxury that not everyone can afford. Buyers use purely discretionary funds on second homes, and in tighter times those funds simply aren’t available.

According to the National Association of Realtors, the median sales price for a second home in 2012 was $150,000, well below the 2005 peak of over $204,000.

Far from an exclusive perk offered to only the wealthiest Americans, buying a vacation home is something many people can do, particularly middle-income earners in their 50s. Knowing that the super-affluent buy multi-million dollar second homes all the time, the median price – half of the sales are above, half are below – of $150,000 means that every day, huge numbers of average buyers find themselves in a position to splurge on that second home.

Consider all costs and caveats

Insurance on mortgages for second homes can be up to 1 percent higher than that for primary homes. Property taxes can be up to twice as much without the homestead exemption offered on a primary residence.

Remember to check the Homeowners Association bylaws, minutes and financial statements. Look for rules that conflict with your intentions, like prohibitions on occasionally renting out your vacation home. And look for dues delinquency rates and any legal problems involving the HOA.

Research local regulations and special taxes to see which ones might affect you, such as real estate transaction taxes or limitations on building.

Get quotes for insurance, including flood insurance. Make sure the home is insurable, and at a rate you’re willing to pay. The features that make a vacation home desirable, such as a waterfront location, also make it more expensive to insure.

Renting out your vacation home

While we aren’t talking about investment properties – those that an investor purchases primarily to rent – it’s possible to lower your cost on a vacation home by renting it out during some of the time that you aren’t using it. In fact, more than 90 percent of vacation home buyers say they plan to rent the vacation home out within the first year. Just remember that you can’t leave valuable or highly personal items in the home if you plan to rent to strangers. Expect a faster rate of wear-and-tear on the home, too, proportional to the amount of time it’s rented. And don’t count on the rental income in order to make the mortgage payments.

If you decide to rent the home, let a property manager help. They can keep the calendar, noting any days you expect to use the property yourself, and arrange for housekeeping, maintenance and repairs.

Choosing your vacation home

Think outside the box when viewing homes in popular vacation destinations. If you’re looking at homes in coastal communities, remember that oceanfront homes not only command a premium, they are also subject to more foot traffic and noise. For your vacation getaway, you might feel more comfortable off the beaten path. Similarly, properties with commanding views fetch the highest prices – you’ll have to decide whether the view is worth the higher sticker price, or that you’d rather buy something less exclusive but still in the desired community. And don’t rule out fixer-uppers.

Getting the mortgage

Forty-six percent of vacation home buyers in 2012 paid cash, and the remaining 54 percent financed the purchase with a mortgage. To get the loan, you’ll need to provide the same documentation that you provided for the mortgage on your primary residence. You’ll probably also need a down payment of 20 to 40 percent, depending on the loan (and particularly for jumbos). The average vacation home down payment in 2012 was 27 percent. You’ll need to show cash reserves to cover at least six months’ expenses, including those associated with the second home. And if you’re planning to rent the home, tell your mortgage broker. Underwriting and requirements for a rental home purchase are different from those for a primary residence.

Get pre-approval for your loan before you view properties. As with all real estate, a well-priced vacation home will be snatched up soon after it hits the market. Be ready to move when you find the home you like.

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