5 Easy Steps to Buy a Second Home

California beach house ready for home exchange vacation
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Before setting out to buy a second home, you probably have reservations that are stopping you from making an immediate decision, such as whether it's too extravagant. When interest rates are low, if you can afford a high-end car payment, you can probably afford a second home, providing you don't go overboard and look for your second home in a reasonably priced area.

There are other things you'll want to consider, from whether you can afford a second mortgage and any issues that will come up at tax time, to the type of home you want and any additional maintenance and other costs that will come into play.

Consider the Location 

You might assume that deciding on a sales price first is the most important step, and while price carries weight, it is not what always drives the decision to buy a second home. If you've got your heart set on a vacation home on the beach in Hawaii, for example, you'll be hard-pressed to buy a single-family home on the water for half a million dollars. If the only place you can afford is near Puna and you don't want to live where it rains a lot, then your search on that island is over.

Location is the driving factor in real estate. It's why you hear the mantra "location, location, location" repeated so much. You also need to decide if you want to buy a second home within a short distance from your present home or if you will take a train or fly to get there.

How often you plan to use the second home will have a direct bearing on its location. If it's a getaway house for the weekend, most likely you'll want this home within an easy commuting distance. If the second home is for a couple of family vacations a year, it can be further away or located in another state or country.

Determine the Type of Home 

The type of home you want to buy for a second home could also involve location. For example, if you're planning to buy a vacation home in the mountains, there are small cabins on the affordable end all the way to high-end ski resort haciendas that can run into the millions.

Some people purchase a second home mainly for investment purposes, but if you're buying the property as a rental, this might affect the type of property you buy and the location. Run a comparison of the mortgage, upkeep and other costs, and subtract it from the monthly rent you can expect to receive. Be accurate by using current market rents for the area for properties similar to yours. Make sure that some tenant damage won't eat up all of your profit, or that you won't put yourself in the black if the place is vacant for a few months.

If you want an oceanfront home, even a small shack will cost a lot more than you may imagine. The harsh truth is that, in the 2019 economy, mortgage rates are forecasted to continue rising and millennials are snapping up properties, so you may need to settle instead for an ocean view.

A home in the country is on the bucket list of some people. Perhaps a condo or townhome is more your style though because you prefer more amenities, and less yard work or maintenance. Condos also offer a lock-and-go lifestyle, which makes some absentee owners feel more secure while away from their second home.

One of the important considerations here is any additional costs incurred to maintain or protect the property in your absence. This could include hiring a property management company to check your mountain vacation home periodically for frozen pipes, water leaks, and other issues.

For example, if you decide to purchase a beach house, be aware that you may need to carry flood insurance, which increased in cost by about 8 percent in 2018. The average cost is approximately $700 per year, but this varies depending on the location and specific flood risks.

Know Your Price Range

Buyers who get in over their heads usually either get swept away by the grandeur of it all or they have failed to establish a maximum amount they are willing to pay to buy a second home. Many buyers who want to buy a second home intend to finance that purchase.

Part of the reason to get a mortgage is that it offers tax deductions such as interest and property taxes. Because of the Tax Cuts And Jobs Act, a cap of $750,000 has been placed on mortgage interest deductions, so run the numbers before you buy to see if you'll be able to deduct any of the interest on your second mortgage.

If you intend to finance the purchase, your maximum price might be affected by interest rates, and the amount of your mortgage payment (plus taxes, etc.) may have a greater impact on you than the sales price.

Pay attention to tax breaks and home credits, because they might not be as generous for a second property purchase. Write-offs and deductions vary based on how much time you spend at your second home, so check with your tax advisor before making a purchase.

One way to figure out if you can afford the mortgage payment is to begin socking away that amount into a savings account every pay period. If it's comfortable and not a strain on your budget, you will most likely be OK down the road, providing you maintain a cushion. Experts recommend at least six months of payments in a reserve fund.

You may also find it more difficult to qualify for a second mortgage because lenders are usually more stringent. Check your housing expense ratio, which means that all of your housing expenses should not amount to more than 28 percent of your gross monthly pay. This includes mortgage, taxes, maintenance cost, HOA fees, and other expenses.

If you begin to find there are few homes for sale in the price range you have established, then it is time to revisit steps one and two. You may need to adjust your expectations: Either choose a different location or a different type of home.

Find an Experienced Realtor

This is not the time to haul your cousin out of the cobwebs and ask him to help you to buy a second home. Look for a local real estate agent who represents buyers in the area where you want to buy. An experienced local agent should possess valuable insight and knowledge in the area.

It's important to keep in mind the long-term or resale value of your property. To this end, an experienced local agent can tell you price histories for comparable homes and how recent sales have fared, as well as resale prospects for your targeted home. The agent can also fill you in on preferable neighborhoods, the goods and bads of a particular home, current market prices, nearby amenities, and ease of access, especially during inclement weather.

Also, don't make the mistake of thinking the listing agent will always have your best interests at heart or that the listing agent will give you a break somehow; choose your agent wisely.

Get a Preapproval Letter 

Your local real estate agent can probably refer a local lender to you. You will fare better with your offer if you use a lender the seller and listing agent are familiar with. You may want to use your own lender back home, but your preferred lender might not lend in that area.

If an unknown mortgage lender could hurt your chances when submitting an offer, you may not want to take that chance.

Many listing agents will advise their clients to reject an offer if it appears without a preapproval letter and there is financing involved. Ask if you can fill out a mortgage application online. You do not need, in most instances, to meet with the mortgage lender in person.

Also, by using a local lender, you increase the chances the lender will pull an appraiser from a local pool of appraisers. It is important to have a local appraiser who is familiar with the neighborhood to appraise your home. Some online mortgage lenders end up with out-of-area appraisers, and that's one way to get a low appraisal that could blow your transaction.

Keep in mind that you will need to be able to qualify for a second mortgage on top of any existing home mortgage you may have. The same requirements will likely apply, including a 10 to 20 percent down payment, meeting certain credit standards, debt-to-income ratios, asset verification, and income documentation.