As I was walking my 3 year old golden retriever Jack this morning, one of my neighbors ran after me. He was very excited to see us and wanted to tell us that he is leaving next week for his summer home in North Carolina. Our conversation turned to why he decided to buy a second home. It then turned 6:30 A.M. and became 85 degrees outside and we both had to retreat to the comfort of our air-condition homes.
Most of the time as a financial advisor it is my job to encourage people to stay within (the dreaded word) budget. We save, scrape and plan for the future and when we retire we hope to have enough to live to age 100 (And maybe leave some for our children). But, what if you want more? What if your plan is to have a wonderful life while working and have a second vacation home? How do you afford a second home, pay for children’s education and also save for retirement? The answer is good planning.
As a buyer of a second home you need a large down payment and have to pass even more lending hurdles than when you bought your primary residence. With some planning, budgeting and perspective, a second home is attainable.
Save a lot of cash. In most cases, you’ll have to make at least a 20% down payment –though lenders can ask for more. Among buyers who finance, the median down payment on a vacation home is now 32%.
Pay down your debt. Lenders will look at your mortgages, car and student loans, and credit cards to make sure your debt – including your future second home mortgage – doesn’t surpass 36% of your pretax income.
Remember to have cash reserves and plan for all the expenses of the second home. One of the keys to success is not to take equity out of your primary home to buy another, or you could end up underwater on one or both.
The best first step is to rerun your financial plan to see if you can afford the payments for the mortgage, insurance, and other property costs. This week I have had 2 clients approach me to rerun their numbers to see how much of a second home they can afford.
Gina and I often discuss the pros and cons of owning a second home. For now we will continue to take a week up north in North Carolina during the summer time.
Until next time,
Plan Today. Protect Tomorrow