How Much Money Do I Need in Reserve to Buy a Second Home?

Many people dream of a second home, whether it's for a vacation getaway or a future retirement place. The reality, though, is that a second home is just that -- another house on which you have to pay a mortgage and do regular maintenance. You'll have to weigh a lot of financial factors before you make the purchase so the second home doesn't swamp you in debt.

Make a Worksheet

Make a financial worksheet to figure out what kind of money you'll need to buy a second home. Put down an approximate amount for a property; use a real figure if you've got a place in mind or figure out what homes cost in the area you're considering. Remember the second home will need insurance, maintenance and upkeep, just like your primary home, so include those costs. List your monetary assets: what you have in equity in your primary residence, your annual income and chances of it continuing, savings other than retirement and anything like stocks you could sell if needed.

Consider Your Options

If you have $200,000 equity in your present house and you think you can get your second home for $100,000, you may be able to refinance your home to pay for the second home. That may cost less than getting a mortgage on the second home, because of fewer closing costs and generally lower interest rates on your primary mortgage. You'll have to see what that does to your monthly payment and weigh that against your income.

Examine All Debt and Expenses

Consider all your debt payments, not just mortgage, and be sure your credit score is acceptable, generally 720 or higher. You also need to factor in other pending expenses, like needing to buy a new car in the next six months or possibly having to put a new roof on your current house. Match those expenses against your income and any savings you have.

Use Savings or Investments

Tap your savings or sell some investments for a big down payment, but don't tamper with your retirement accounts. You'll not only reduce your potential retirement income but will probably have to pay penalties to take that money out. Be conservative. Build a cushion into your plans so you don't put every available dollar into a second home with no reserve for emergencies.

Think About Renting

Renting out your second home will reduce the amount of reserve you need, but it will change your income tax situation. You can rent it out for 14 days a year and still deduct mortgage interest for taxes, just like on your primary home. Renting it for more than 14 days a year will bring in more money but you'll have to report that as income for taxes based on the percentage of time you rent it.

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