Second Home Buying Manual
Buying a second home is a major financial accomplishment, but it can be a financial nightmare if you don’t properly plan. Before you get caught up dreaming about your peaceful, serene weekend getaway, remember that it’s also a major financial responsibility.
Here are a few suggestions for anyone interested in owning multiple homes.
Watch mortgage outlays. A useful rule of thumb is not to spend more than one-third of your net household income, the amount you take home each month after payroll and income tax deductions, on mortgage payments. If you take on two mortgages at once, make sure the sum of both payments is below this threshold.
Remember, you don’t receive a mortgage interest deduction for a loan on a secondary home. Also, mortgage interest rates on second homes are higher than on primary residences.
Repair costs increase. You will face more costs than just the extra utility bills at your new home. On average, annual maintenance and repairs are about 1% of the home’s fair market value. For example, the additional upkeep on a home valued at $500,000 is about $5,000 per year.
However, these costs are lumpy: They don’t occur consistently. Repairs, such as fixing a seawall, putting in a new dock or overhauling the landscaping, are large expenses that occur every five to 10 years. Set aside 1% of the home’s value into a separate account each year. If you don’t have any major expenses in one year, let the account build up so you are ready when large expenses occur.
Overlooked expenses. There are other miscellaneous expenses that homeowners overlook. If your second home is on the water, you find a wellspring of costs if you also decide to get a boat. Don’t forget the extra costs for insurance, storage, docking, gas and maintenance for the vessel.
Also, your home and flood insurance costs may be much higher than you are used to. Think about your travel expenses to and from the second home. Some communities charge homeowner’s association or club dues. Resort areas tend to have higher property tax rates, so check on those as well to avoid surprises.
You might also need someone to maintain the yard or shovel snow. The rounds of golf, skiing and fishing trips you plan also cost a lot of money. Take time to consider all possibilities and prepare accordingly. If you can’t afford all of these extra costs, you should wait before you buy a second home.
Test-drive the neighborhood first. Unless you are intimately familiar with the area, take time to learn the lay of the land before putting down permanent roots. Before buying a home, explore different neighborhoods or communities by renting homes until you find your perfect fit.
You might find that your first choice of locale doesn’t have all the things on your wish list and you might not like the neighbors. The friendly real estate agent probably won’t mention that the neighborhood is really a late-night party spot for college kids on spring break. You need to know these details before you take the plunge.
Buying a second home is an exciting milestone very few people enjoy. Don’t ruin your experience by missing important financial planning steps.
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Blair Hodgson DuQuesnay, CFA, CFP, is a financial planner and investment advisor in the New Orleans, La. who specializes in working with young professionals and families. She regularly posts her financial insights on her blog, http://overconfidentinvestor.com/.
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