Should You Buy a Second Home Before Retirement?

If you have plans to buy a home at the beach, in the mountains or in the desert for your retirement years, you might be tempted to take the plunge and buy your future home now while interest rates and home prices are low.

Financial experts say  However, people in this age group should be aware of the risks of tying up money and perhaps losing flexibility with a second home purchase.

While there's no denying that we are in experiencing historically low interest rates and low home values right now, anyone considering buying a second home before they retire needs to run the numbers. People get stars in their eyes sometimes at the prospect of retirement, but the reality is, they may not be able to afford to buy another home right now.

Future retirees are better off maxing out their 401(k)s and make sure they have adequately insured their future before thinking about buying retirement homes.

Financing another home before retirement

For 50- and 60-somethings with plenty of discretionary income, buying a home with cash is an option. Others need financing.

There are three basic options for financing a home.

The home can be financed as an owner-occupied home if the buyer lives in it as a primary residence, as a second home or as an investment.

Second-home financing means you will need to qualify to pay the mortgage on both your current home and your second home. If you need some additional income to qualify for the loan, you can rent the property, and a lender may use some of your rental income for a loan approval.

Some lenders suggest that financing a property as a second home rather than as an investment property is the better option because interest rates, qualification guidelines and down payment requirements are generally more lenient on second homes than on investments. An investment loan always requires a down payment of at least 20 percent or 25 percent.

People getting ready to retire might want to consider the benefit of buying homes before they stop working because a mortgage approval could be more difficult to obtain without an income.

Most financial planners will tell potential retirees that buying a second home is not for people who are just getting by. This should only be a choice for people with the income and assets to handle it.