How to Afford a Second Home

Many dream of being able to afford a second home for a vacation get-away, as an investment, as an extra income source or all three. It is important to make sure you can afford a second home before you decide to buy one. A second home can be enjoyable, but not if you go broke buying it. Here's how to truly afford a second home.

Instructions

Difficulty: Moderate

1. Get out of debt. As simple as this sounds, it is a crucial step. If debt-—from credit cards, student loans, vehicles and lines of credit—-is drawing from your income, you're not ready for the large financial commitment of a second home. To ditch debt, follow Dave Ramsey's Baby Steps to debt-free living.
2. Save money for an emergency. You should have 3 to 6 months of living expenses in the bank in case of an interruption to income or an emergency. This way, if something goes wrong, you will be able to continue paying both home mortgages.
3. Save money for a down payment for the second home. Many banks require 20 percent of the purchase price as a down payment for second or investment home purchases. This instant equity also protects you in case of a downturn in the market-—you'll still be able to afford to sell your home without paying money at closing.
4. Calculate the payment for a 15-year mortgage in your desired price range. Build up your down payment until you can afford the 15-year mortgage, which is a much better indicator of the amount of house that you can afford than the 30-year mortgage.
5. Look for a less-expensive home in the area where you want to buy. If you can't afford the house of your dreams, find something smaller that still provides the features you most desire, such as proximity to a recreational area or a fantastic view.
6. Rent the home out when you are not occupying it. Try Vacation Rentals by Owner. Determine when to rent it out based on your own use. Renting the home for several weekends a month could cover your month's mortgage payment.
7. Pay cash. If you have enough cash on hand (without dipping into your emergency fund or savings earmarked for other purposes) to buy a second home, you can afford one.

Tips & Warnings

• Do not tap into your primary home's equity to fund a second home. If you can truly afford a second home, you can do it without risking your first house.