Home Update Newsletter

Whether you’re in the market for a lakeside cottage, a mountain cabin, a ski chalet or an island retreat, the vacation home market is warming up. If you have strong credit scores, this could be the right time to take the plunge.

Vacation home sales are on the rise

According to the National Association of Realtors, vacation home sales recovered in 2009. NAR’s 2010 “Investment and Vacation Home Buyers Survey” indicates that in 2009, vacation home sales rose 7.9 percent nationally to 553,000, up from 513,000 in 2008. Around one in ten residential home purchases in 2009 were vacation homes, about the same share of the market as in 2008.

Half of vacation homes purchased were in the South, 21 percent were in the West, 17 percent were in the Midwest and 12 percent were in the Northeast. Seven out of ten vacation homes purchased were detached single-family homes, and the overwhelming majority of them were more than 100 miles from their owner’s primary residence. The median price of a vacation home increased by 12.7 percent from 2008, possibly because more vacation home sales were occurring in higher-priced markets.

In short, the numbers for 2009 are a good indication that the vacation home market

picture is looking brighter all the time.

A good market for qualified buyers

Prices on vacation homes are rising again, but are still well below vacation home prices from just a few years ago. With interest rates remaining quite low, mortgages on vacation homes are also relatively low. Together, these two factors spell “opportunity” if you’re a qualified buyer: a good deal and a low-interest mortgage on the vacation home you’ve always wanted.

According to a January 10, 2010 article in The New York Times, “Lenders now appear willing to finance second homes, but borrowers must be patient, eminently qualified and strategic about their house choices.”

In general, you need a strong credit score and a substantial down payment to qualify for a mortgage on a vacation home. But requirements can vary from one lender to the next. Make sure that you have a lender and a mortgage that can accommodate your needs.

Get more vacation home for your money

Many vacation homebuyers ultimately sell their primary residence and spend their retirement in their vacation home. If you have the credit score and down payment to qualify for a vacation home mortgage, you’re in an excellent position to purchase the kind of home you might want to live in year round, for years to come.

In the current market you can actually get more value for your dollar than you could just a few years ago. That means more square footage, recent updates and amenities that might once have been out of reach. So if your long-term plan is to buy a vacation home and, when the time comes, retire there, consider putting your plan into action.

For buying a vacation home

Make sure your vacation hideaway isn’t too well hidden

An isolated location can mean that emergency services are limited or remote. Your dream home should be a reasonable distance from a hospital, fire station and police station, and should not be difficult to reach in an emergency.

Check the area for natural disasters

Many prime vacation spots are subject to hurricanes, floods, forest fires, earthquakes or other natural disasters. Even if your house is never touched, it can be very stressful if it’s in a vulnerable location. In addition, homeowner’s insurance is more expensive in areas prone to natural disaster.

Get reliable backup for the off season

If you buy a vacation home far from your principal residence, be sure there’s someone you can depend on to handle off-season maintenance. You don’t want to return to your

vacation house and find that a leaky roof has turned into a mess of mold and mildew, or that a few pests have turned into an infestation. It’s wise to get someone who can check your property and report back to you on a regular basis.

Don’t skimp on homeowner’s coverage

It might be tempting to choose insurance coverage with a high deductible for your vacation home, but remember that if anything goes wrong, you may need to dip into your retirement savings to cover a loss.

Vacation home, year-round benefits

A vacation home is more than just a welcome retreat in a beautiful setting. Owning a second home offers you tax and other financial benefits as well. Here are a few of the highlights.

If you take out a mortgage to buy, construct or substantially improve a second home, the interest is tax deductible. What’s more, the real estate taxes and points you pay over the life of a mortgage on a second home are also tax-deductible. In both cases, you must itemize your taxes to qualify for the deduction.

Rent out your home for 15 days or more per year and you can deduct your taxes, mortgage interest and operating expenses. But you will have to declare the rental income.

If you use your vacation home as a residence and rent it out for less than 15 days a year, you don’t have to declare the income you earn. You can still deduct your interest and taxes, if you itemize your deductions, but you can’t deduct your operating expenses.

Take out a home equity loan or line of credit on your second home, and your interest will be fully deductible unless the mortgage exceeds the fair market value of the home (reduced by the value of the mortgages).

If you use your vacation home as your primary residence for two of the five years preceding the sale of your home, you can exclude up to $250,000 ($500,000 if Married Filing Jointly) on capital gains.

Tax laws change every year, so consult a tax professional to learn more.