Not long ago, Frank Kwok moved from a 900-square-foot townhouse on the North Shore of Oahu, Hawaii, "because we wanted our own home with a yard and everything." So he bought a 2,500-square-foot home in what he calls the "bustling suburb" of Kapolei, not far from Honolulu.
He kept the tiny townhouse in the beach town of Haleiwa. It's now his family's second home: "We go back there whenever we don't want to be bothered by neighbors."
Kwok did it backward--turning the first home into the getaway home--but he did something that many Americans do or dream of doing: He bought a second home.
Buying a second home isn't much different from buying a primary residence. If you don't rent it out regularly, so it's not considered an investment property, you can get the same mortgage rate that you would get on your primary house. You might be able to deduct the mortgage interest from income taxes.
When you shop for a second or vacation home, take your time.
"If they look for a second home, people need to be patient," Kwok says. "Don't rush into it. They already have a place to live. Weigh the pros and cons of each place."
Bob Walters, vice president of Quicken Mortgage, delivers the same advice. "Don't make any rash decisions," he says. "There's no reason you have to buy it right now. If you find a place and love the place, stew on it a couple of months. It'll still be there."
During your self-imposed cooling-off period, think long and hard about how often you will visit and how much time you will spend. Then ask whether it's worth the money.
"You have to view it with a cold and calculated eye," Walters says. How much time will you spend there? What will be the price appreciation--realistically? How much will you have to pay every year for landscaping, association dues, garbage collection and taxes?
And don't try to time the purchase to get a better price. That tactic rarely works, says Diane Saatchi, a real estate agent who sells homes in the Hamptons on Long Island. "The best time to buy a house is when you want a house," Saatchi says.
Make sure you can get the insurance you need, particularly if you want to buy a home near the beach. "That's a good thing to know--the availability and cost of insurance--before you pay for legal fees and inspections," Saatchi says.
The next step is to find a mortgage. Walters says that the loan standards for primary and secondary homes are virtually identical. Rates are about the same, unless the lender considers the house an investment property. In that case, expect to pay an interest rate about 1.5 to 2 percentage points higher.
In making a down payment on your second home, you can use the equity in your primary home. You can either extract the equity by taking out a "cash-out" refinance, or by getting a home equity loan or an equity line of credit. You can use that equity to make all or some of the down payment on the second home.
There are complex tax implications to borrowing to buy a second home. Generally speaking, the interest is deductible from federal income taxes. But if you borrow from the equity on your first home to make a down payment on the second home, you can write off the interest on only the first $100,000 of equity debt.
