Buying Second Home Could Pay Off Big

With housing prices falling and mortgage rates at historic lows, buying a second home may be a good investment if you plan the purchase carefully.

Obtaining a loan in this climate will be challenging, but if you have a good credit score and some extra money on hand, a second home might pay off big down the road. Here's what you need to consider before you buy:

Be sure you can afford it: The asking price doesn't tell the full story of a second home's cost. Lenders often require a 20% to 30% down payment on a second-home purchase. You're also likely to pay a higher interest rate to cover what lenders see as the increased risk of default. If you get into financial trouble, they reason, you're likely to prioritize the mortgage payments for your primary home. Run the figures thoroughly with your real estate agent before you commit.

Also, consider the hidden costs of a second home. Especially if you buy a condo, you will have to pay a homeowner's association fee. And plan to keep a fund worth about 2% of your home's cost for annual maintenance.

And be sure to factor homeowner's insurance into your budget. This policy is likely to be more expensive than insurance for your primary residence. Because you'll be on the premises less frequently, your insurance carrier must factor in greater liability costs.

Don't be overly optimistic about rental income: Many second-home buyers plan to cover their costs by renting the home to other vacationers. Bear in mind, however, that the economic climate, bad weather and pure capriciousness may leave you with fewer renters than you hoped.