by Marilyn Lewis
The appeal of second homes is universal. Russians have their dachas, Swedes their stugas and the French their pied-à-terre. And Americans want second homes. For many, the second-home dream has some predictable On Golden Pond components: kids squealing and splashing in golden summer light, family and friends hanging out together, taking long walks between even longer naps.
But many folks aren't motivated by romantic notions, per se; they just want a home away from home—a place to golf, ski, swim, sail or a change of scenery. Suburbanites and country mice are getting condos in the heart of the city. City dwellers are buying second homes in the mountains, at the shore or down a country lane. Last year, thanks to aging baby boomers and changes in the tax code, second-home sales made up a quarter of the residential real estate market.
Today, middle-aged Americans are transforming rural areas, small towns and resort communities in their pursuit of recreational havens, landing pads for retirement and investments to diversify stock-heavy portfolios. Yet folks from the 77 million-strong baby boom generation aren't the only buyers. Gen-Xers and even 20-somethings are getting second homes, too.
The question is: How?
The cash option
For a surprising number, the "how" is simple: Pay cash. In St. George, Utah, where home prices shot through the roof a year ago, real estate agent David Ellis estimates half his clients pay cash.
"There is a limited number of people who, crazy as it is, are financing their second homes," Ellis says. St. George's relatively low prices, red rock vistas and proximity to the Grand Canyon and other parks draw urban refugees, many of whom have cashed out longtime family homes in expensive Southern California markets.
Walter Molony, spokesman for the National Association of Realtors, explains the big picture: The second-home market is being driven largely by a 1997 change in the tax code that allows a couple to exclude up to $500,000 ($250,000 for singles) in profit on the sale of a home from capital gains tax.
"For the first time, this freed people to make housing choices based on their needs and desires rather than on avoiding that tax consequence," Molony says. Before, the incentive was to "trade up." Now, downsizing is popular with boomers' selling big family homes that have appreciated mightily. With pockets full of cash equity, many can buy both a smaller home and a vacation house or investment property.
In 2004, about 29 percent of residential property buyers who financed were using proceeds from sale of a primary residence, according to a survey by the National Association of Realtors.
Financing your second home
Not long ago, when financing second homes, mortgage bankers demanded heftier down payments and higher interest rates and insurance fees. Today, says David Hehman, president of EscapeHomes.com, which helps people buy second homes, these extra costs have mostly been erased by competition. Some lenders may still charge an eighth point extra because lenders see risk in a home that's not constantly monitored by the owner. Still, in years past, Hehman says, a second-home borrower would have paid a quarter or a half point extra.
Robert Jangaard, a Whidbey Island, Wash., resident, recently financed the construction of a recreation home at Lake Wenatchee, near Leavenworth, Wash. He and his family escape there to ski, golf and hike the mountains. Jangaard says that his bank didn't ask for anything special for the second-home loan—no extra points or fees or a bigger down payment. "It's not harder. In fact, it gets easier the more you borrow," Jangaard quips. "It's all based on how well you know the banker and how familiar they are with your situation."
But, points out Dave Martin, a mortgage banker with First Horizon Home Loans in the Seattle area, you must have enough income to qualify for both your principal residence and your second home if you are financing both. Martin recently financed a vacation home in Chelan, Wash. He, too, he found no difference in the requirements or costs of the loan.
You will pay more, though, if you plan to rent out the second home. Investment property, as it is considered, is financed and insured at higher rates.
Financing advice
For those financing a second home David Hehman, from
EscapeHomes.com, offers these tips:
- Identify your primary motive. Is it relaxation, retirement or investment? There's nothing wrong with, say, renting a second home out until retirement. But get clear on your main goal. Don't stretch so far for a vacation home that you're forced to rent it out, or buy an investment property where you want to retire but the market is stagnant.
- Apply for financing in the town where you are buying; bankers there may give better terms because they appreciate the market.
- Caution: You'll be paying for two of everything: new roofs, yard maintenance, appliance repairs. Budget wisely.
- Don't kill yourself financially, especially on a vacation place. "The most important thing is pure enjoyment and peace of mind; that's why you're buying a second home," Hehman says.
- Try Internet loan sites to get lenders bidding on your mortgage. A few to try include E-Loan, Lending Tree, The Loan Page and Total Move.
The friends-and-family plan
A number of people who can't foot the whole bill are doing what their parents and grandparents have done: Going in with family or friends on a vacation home.
The big issue is figuring out how you'll share. There are as many ways to divide up the pie as there are opinions in the group. By brainstorming and negotiating, invent a system that reflects your philosophies, resources and needs. A cash-strapped partner could throw in more labor than others; older family members with more means might pay a larger share and be spared some of the more intensive chores.
The important part is putting your agreements down on paper. Make contracts to cover financing, maintenance and even how the house will be shared. You can always ease off later if these feel too formal. But tightening up a sloppy, unhappy situation can cause pain and resentment.
And this is your place for fun, remember?