- - Wednesday, November 23, 2011

If you long to retire within sight of the Chesapeake Bay, by the shores of Deep Creek Lake or atop the mountains at Wintergreen, you may be thinking about taking advantage of today’s low interest rates and affordable prices to buy your golden-years dream home right now.

Financial advisers and Realtors suggest that while this might be the right move for some homeowners, the decision to buy a second home should be made only after careful consideration of the impact the choice would have on finances and lifestyle.

“The first and most important consideration is to make sure that buying another home doesn’t compromise your overall financial plans,” said Ronya Corey, a financial adviser with Merrill Lynch in the District.

“You can definitely see the advantage of buying a retirement home in this environment, with low mortgage rates and lower housing prices, but I always tell people, ‘You shouldn’t necessarily buy something just because it’s on sale,’ ” she said. “Buyers need to realize that unless they own a paid-off home right now, they will be making two mortgage payments.”

Ms. Corey said some pre-retirees may want to buy a second home and rent it out for a few years so they can add the rental income to their retirement savings, although she warns that the owners may need to do extra maintenance or repairs once they are ready to live in the property. They also will have to make property-tax and insurance payments on both of their homes.

Frank Donnelly, incoming president of the Metropolitan Washington Mortgage Bankers Association, said a recent association survey showed that while the average second-home purchaser keeps a vacation home for 15 years, those older than age 50 average just six years of ownership of a second home.

“If the buyers are absolutely sure they won’t change their mind about where they want to live when they retire, buying a home now could be the right decision,” Mr. Donnelly said. “But if you are as far away from retirement as 10 years, it might be better to wait until you are little more firm in your plans. Your circumstances could change a lot in 10 years, and then you might be stuck with a property you can’t sell.”

Mr. Donnelly suggested that second-home buyers purchase a home as a place to enjoy now and in the future rather than as an investment because property values are uncertain.

“If you are as far away as 10 years from retirement, I’ve found that it’s best to rent places for vacations where you think you want to live to look at the community and to consider the distance from your current home,” Ms. Corey said.

Leslie Kopp, an associate broker with Long & Foster Realtors in Bethany Beach, Del., said many buyers are taking advantage of low prices and low rates to purchase a vacation home that they plan to use as a future retirement home.

“If someone isn’t retiring for another 10 to 15 years, they are less focused on their future needs, but for those retiring within a few years, it’s important to discuss the difference in living at the beach year-round, Ms. Kopp said.

While many of her buyers use their home for frequent vacations, others choose to rent their property until they are ready to retire. This decision has an impact on buyers’ financing options.

“If you can pay cash for a second home, that could be a good option, but you need to be careful of making sure you have diversified your investments and will have enough liquid cash available for spending while in retirement,” Ms. Corey said.

Mr. Donnelly said the terms for financing a second home generally are better than those for an investment home.

“Mortgages for a second home usually require at least 20 percent for a down payment, good credit and an overall debt-to-income ratio for both housing payments as well as other regular payments of 45 percent or less,” Mr. Donnelly said.

“To qualify for an investment loan, you’ll usually need at least 25 percent for a down payment, and interest rates will be about three-eighths of a percent higher. The debt-to-income ratio should be a maximum of 45 percent,” he said. “Lenders also usually require rent-loss insurance, which can be expensive, if you are using some of the rental income to qualify for the loan.”

Mr. Donnelly said most lenders typically want borrowers for an investment property or a second home to have a credit score of at least 720 to qualify for the best terms. Second-home buyers need cash reserves of at least two months, while investment properties require at least six months of mortgage payments for both properties.

“The concern is that if homeowners run into financial trouble, they are more likely to keep their first home and let the second home go,” Mr. Donnelly said.

He said he recently read a study that showed that a second home typically is a very small part of an overall retirement plan.

“Usually, consumers who own a second home that they will use for retirement have either paid off their first home or are paying cash for the second home rather than financing it,” Mr. Donnelly said. “If they are having trouble qualifying for both mortgage payments, this may be a sign that they should not be overextending themselves to buy another property.”

In addition to considering the impact of a second-home purchase on retirement finances, potential buyers must evaluate their lifestyle carefully.

“Some buyers focus so much on the fact that they want to be near the beach that they forget to think about where their furniture will fit in a beach home,” Ms. Kopp said.

“A lot of the homes here have a different floor plan, without a formal dining room or a formal living room. People also forget to think about storage, which can be a problem because many of the homes are designed for vacations rather than year-round living.” she said.

Ms. Kopp said buyers should consider the size of their home and whether they can accommodate visitors for the holidays or for summer vacations. Some buyers opt for a smaller home and intend to pay for a short-term rental for visitors.

“Prospective buyers also need to think about where they want to live,” Ms. Kopp said. “While everyone thinks they want to be right at the beach, it tends to clear out in the winter, and some people end up moving inland to a nearby planned community, which has more year-round residents.”

Though most pre-retirees prefer to think about retirement only in terms of fun, Ms. Kopp also suggested that buyers evaluate the potential to age in place.

“The most popular floor plans in this area are two-level homes with a first-floor master suite and guest rooms upstairs,” Ms. Kopp said, “but we also sell a lot of homes with elevators.”