Is the Time Right to Buy a Retirement or Vacation Home Now?
If you have always dreamed of retiring to the Rocky Mountains or the
sunny shores of Florida, the affordable home prices and low interest
rates of the current real estate market could have you thinking of
purchasing a second home. While real estate agents as well as financial
advisors are both suggesting that there may never have been a better
time to purchase a second home, the final decision of whether or not now
is a good time to buy a vacation home should be based on careful
consideration. Not only must you consider the impact such a decision
will have on your overall finances, but you must also consider how your
lifestyle will be affected.
One of the first factors to be considered is how your financial plans
will be affected by such a decision. There are certainly advantages
associated with buying a vacation home or retirement home given the
current market conditions; however, just because you can buy something
at a low price doesn't mean it necessarily makes good financial sense.
It is imperative for prospective buyers to recognize that unless their
first home is paid off, purchasing a second home will produce two home
mortgage payments.
One option you may wish to consider if you are not quite yet ready to
retire is to rent out your second home for a period of time. This will
allow you to add in the income from the rental to your retirement
savings and have a larger nest egg when you do retire. Of course, it
should be kept in mind that you will need to be prepared to pay for
repairs and additional maintenance once you are ready to begin living in
the property. In the interim, you will also need to be prepared to be
responsible for insurance and property tax payments.
You should also give careful thought to whether you are certain about
the location of where you wish to retire before purchasing a property.
If you are absolutely certain about retiring to a certain geographic
location, taking advantage of low prices and interest rates right now
could prove to be a good decision. On the other hand, if you are still a
long way from retiring, it could be a better idea to wait until
retirement is a little closer. Circumstances and even preferences can
change dramatically in just a few years and you could find yourself
stuck with a home you no longer want when you are ready to retire.
One of the more common reasons for buyers to purchase a second home is
as a future investment. The downturn of the housing market has
underscored the fact that this can be a risky gamble. Instead, many
financial advisors are suggesting that purchasing a home to enjoy now
rather than banking on future financial gains is a better idea.
You must also consider the impact investing in a second home will have
on your future finances. While paying cash for a retirement home or
vacation home right now, given low prices, might appear to be a good
option, you must keep an eye toward the future. Consider whether your
investments are diversified enough and ensure you will be able to
maintain a sufficient amount of liquid funds for retirement when it
actually arrives.
If you do decide to invest in a second home, financing could still be
the better choice. Not only are interest rates low right now, but buyers
will also find the terms offered for financing a second mortgage are
often more attractive than terms for purchasing what is classified as an
investment property.
Buyers of second homes will typically need to provide a minimum down
payment of 20% and will need to have good credit. In addition, your
debt-to-income ratio should be at or less than 45%. On the other hand,
if you are buying a property that you classify as an investment, you
will need a minimum down payment of 25% and can expect to pay an
interest rate of up to three-eighths of a percentage point higher. Many
lenders will also require buyers of investment properties to carry
rent-loss insurance; a purchase that can be costly. This is particularly
true if you plan to use a portion of the rental income in order to
qualify for the loan.
You should also expect to have a minimum credit score of 720 in order to
qualify for the most appealing loan terms. Those buyers planning to
purchase a second home should have a minimum cash reserves of two
months. Buyers purchasing investment properties will need cash reserves
of at least six months. Lenders want to be assured that in the event you
experience financial difficulties; you have the reserves to see you
through.
The purchase of a second home can certainly prove to be advantageous,
especially given the historic low prices and interest rates buyers are
seeing today. Carefully considering the overall impact to your finances
today as well as in the future can help you to determine whether or not
now is a good time to purchase a second home.
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