Buying a Vacation Home
By: Jeff Brown

Many Americans share the same fantasy: a “summer place” to pass down through the generations.

There could be plenty of bargains out there this year. But before you make a long-term commitment to a vacation home, take a reality check. Not everyone is cut out for the hassles and expense of a second home.

In many places, vacation home prices are down even more sharply than prices of primary homes. The National Association of Realtors said the median vacation price fell by 23 percent between 2007 and 2008. Since a vacation home is not a necessity, demand can drop suddenly when the economy is in trouble.

Combine the low prices with today’s low mortgage rates and you may find a second home within reach. Despite a recent uptick, the 30-year fixed-rate mortgage is still at historically low levels of about 5.5 percent, according to the BankingMyWay.com survey.

While you may need a down payment of only 5 or 10 percent to buy a primary residence, the lender is likely to demand 20 percent for a second home. Lenders figure that a homeowner who runs into trouble will let payments on the vacation property slide first.

Interest and tax payments on a second home would be deductible on your federal return. If you rent the property out, maintenance, advertising and other outlays can be deducted as business expenses.

But to get all the business deductions, you have to limit your own use of the property, generally to 14 days or less. It’s a complicated matter, described in IRS Publication 527. If you use the property yourself, for example, a loss caused by rental expenses exceeding income cannot be used to offset other types of income, such as profits in the stock market.

Projecting the costs of maintaining a second home can be devilish. You may have to pay pros to do things you do for yourself on your main home, like mowing the lawn and minor repairs, and you may have to pay an agent to deal with renters.

If you plan to rent the property, remember that the highest rents come in the high season, when you’re most likely to want to use the property yourself.

Other things to consider:

• How much time can you commit? Are you willing to travel to your vacation spot in the off season to oversee maintenance, prepare the property for the season and close it up after the season ends?

• Will you have a big contingency fund? What if the place doesn’t rent, or if rents fall? Will you have money for a new roof or air conditioning system?

• Do you like the idea of vacationing in the same place every year? Some people love a summer tradition, while others get bored and wish they had more variety.

• What’s your exit strategy? Will you sell the place someday, or pass it to your children and grandchildren? If the property will have multiple owners after you pass it on, who will be in charge and how will conflicts be resolved?

Unless you are a savvy real estate investor, it’s best to look on a vacation home as a pricy luxury. If you love the place and are willing to shoulder a lot of chores and costs, go for it. Otherwise, just rent a place for the weeks you want, and let someone else live with the hassles.

If you decide a vacation home makes sense, use the shopping tool to find a mortgage at below-average rates. For example, Sovereign Bank (Stock Quote: STD), offers 30-year fixed-rate loans for just under 5 percent, while J.P. Morgan Chase (Stock Quote: JPM) has a five-year adjustable-rate loan at 4.875 percent.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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