Financial experts say buying your second home or retirement residence five to 10 years before you stop working is a smart move.
"[However] buying a second home is not for people who are just getting by," says Patrick Cunningham, vice president of Home Savings and Trust Mortgage in Fairfax, Virginia, “This should only be a choice for people with the income and assets to handle it."
Here are five key factors to consider before you take the plunge.
1. Fund Your 401(k)
Kimberly Foss, president of Empyrion Wealth Management in Roseville, California recommends clients properly fund their 401(k)s. In addition, buyers should have at least 12 months' worth of expenses in the bank as an emergency fund.
2. Refinance the Right Way
For those not paying in cash, homeowners can either finance it as an owner-occupied home, if the buyer resides in the home, or as a second home.
Interest rates, qualification guidelines and down payment requirements are generally more reasonable on second homes than on investments. An investment loan requires a down payment of at least 20% or 25%.
3. Decide If You Will Rent Your Second Home
One of the primary benefits of buying a home before retiring is rental income. If you use the property as a rental property, you can gain tax advantages as well.
4. Consider the Location
Approach your property as you would any other investment and evaluate the potential resale value based on the location, community amenities and floor plan. Look for an urban-suburban location with nearby amenities, healthcare facilities and cultural opportunities.
5. Be Flexible
Second homes are often in resort areas. If you are more than 10 years away from retirement, rent your second home choice first to see how it fits you and your family.. While renting, investigate the neighborhood and familiarize yourself with the surrounding area.