A Florida Home Mortgage on a Vacation House? Consider a Few Factors First
It’s summer. Perhaps you’ve recently been away and grown more inspired than ever to purchase a second home. You aren’t the only one having such thoughts.
“A lot of people go on vacation, look at real estate fliers and suddenly decide they want to buy a house,” says David Hehman, CEO of Escapehomes.com.
It makes sense - but in the current market, does using a Florida mortgage loan on a vacation home actually make cents? Is your heart running away from your head? As prices rise, but demand slows, individuals need to accept that they’yre no longer going to get rich quickly by buying a second home. Between 2001 and 2006, the median home price in the 30 top vacation markets rose 120 percent, according to David Stiff, senior economist for Fiserv Lending Solutions - nearly twice as much as the appreciation in primary markets.
Moreover, second home prices are even more vulnerable to a downtun - nobody NEEDS a second home.
For a prime example of how quickly markets can turn, consider the Naples housing market. The city showed a nearly 40 percent appreciation between the fourth quarters of 2004 and 2005. However, between June 2005 and June 2006, sales volume dropped 48 percent, according to the Florida Association of Realtors.
Think twice about a vacation home investment
Michael Costa, a 39-year-old equity trader in New York City, can tell you all about the problems with trying to make a quick buck off a vacation house. In July 2004, he used a Florida home mortgage to buy a house in Naples, largely because it was one of the hottest markets he could find.
By the time he listed the house in fall 2005, the market was already deflating. The property took 10 months to sell - and he received 19 percent less than his original asking price. Costa made money, but not nearly as much as he would have months earlier.
So far, however, Naples’ rapid decline seems to be an anomaly. Like primary home sellers, second home sellers have been hesitant to drop prices, Stiff says, preferring instead to keep their houses on the market longer.
As a result, prices in many vacation areas have continued to rise, though at a slower pace.
Think long-term
It’s not all grim news. The moral of this market: If you are going to consider a Florida home mortgage loan for this purpose, do it for love, not money. Do it because it’s a place you adore and will want to use for years to come. That way, even if prices dip - or plummet - you will be able to enjoy it while you wait out the fluctuations.
“Right now you should be thinking consumption rather than investment,” says Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies.
If you fall into this category, if you’ve always dreamed of owning a piece of oceanfront or having a slope-side condo for ski season, you may actually find today an appealing time to buy. The deflating bubble has shifted the power in the market from seller to buyer. In most markets, inventory is rising, and consequently, owners are offering incentives and showing a willingness to negotiate.
Meanwhile, the rental market is recovering from a prolonged slump brought on by the ownership craze. Rising Florida mortgage rates have made renting more feasible than buying for many. Rents are rising in a number of markets, while occupancy rates are at five-year highs.
Remain realistic with your second Florida home loan
Don’t let the fresh air and margaritas kidnap your common sense. It’s important to be realistic, especially in an uncertain market. Take a reality check: Can you afford this?
“The basic rule of thumb is that your housing costs - including those for your primary home - should be a third of your overall income,” says Jay Mastilak, a certified financial planner and senior vice president for PNC Investments. Include mortgage, maintenance, property taxes, association fees, insurance and travel expenses.
It’s also worth noting that higher rates on mortgages and Florida home equity loans may cancel out the advantages of buying at a narrow price cut. Make sure you do the math.
The next thing to figure out is whether you’ll spend enough time at the house to justify the expense. Come up with a back-of- the-envelope estimate by adding up annual expenses and dividing that sum by the total nights you’ll spend there. Don’t be surprised if you find it’s cheaper to stay at a five-star resort.
Finally, ask local agents for appreciation averages for the past 10, 20 and 30 years; ideally, you’ll see a positive number. This could encourage you to make an offer on a vacation house that could become both an investment and a nice place to visit over the years.
