13 May Can I afford to buy a summer home?

Q. I’m thinking about buying a summer house but I don’t think I can afford a mortgage. The house would be a lake house costing maybe $1.5 million — or that’s the dream home. I make $225,000 between me and my wife and we only have five years left on our own mortgage. Our house is worth about $800,000. Can I take out the home equity to use as the down payment on the summer house and then try to handle both mortgages or is this a bad idea?
— Hopeful

A. Taking on a second home adds a lot of financial responsibilities beyond a mortgage.

Plus, you didn’t mention your retirement savings. As you consider a purchase, don’t forget that your ongoing costs will probably have a big impact on your ability to save for the future.

But we took your question to Jerry Lynch, a certified financial planner with OneDigital in Boonton, who started us off with a Shakespeare quote.

“There is nothing either good or bad, but thinking makes it so.”

(That’s from Hamlet, in case you were wondering.)

“As a real estate investor for many years, I always say one thing: know your numbers,” Lynch said.

He offered this: The cost to borrow $100,000 at 7% for a 30-year mortgage is $665 per month.

“Assuming $1 million borrowed, your monthly mortgage cost is $6,650 or $79,836 annually,” he said.

Then you need to add taxes, maintenance and repair costs. And utilities, and insurance, and more.

“Just eyeballing this it looks like your cost to do this — assuming that you did not borrow the $500,000 down payment, is around $100,000 annually,” he said. “So no. Those numbers will never work.”

If you used your home’s equity for the down payment, your cost would increase by around $40,000 a year, he said.

You could consider renting out the home, but that’s not without issues, he said.

“You really have around 10 prime weeks per year to rent,” he said. “It’s hard to make enough money in 10 weeks to pay those costs.”

And if you used a rental service, it would reduce your revenue significantly.

Also, the more people who come through your home, the more the home could get trashed and your repair costs would be higher, he said.

And if you rent, you would lose out on using the home during the times you may want to be there yourself, he said.

Buying a smaller home would be a possibility, Lynch said.

“I like that as it puts you in the area so if prices spike like they did down the Jersey shore, you are not priced out of the market as you would have gotten a nice gain on your lower costing property,” he said.

But overall, this sounds like a losing proposition at this time, he said.

“Having two homes is very expensive and if you get in over your head, it is reasonable that you can lose a tremendous amount of money,” Lynch said. “The prices on second homes make no sense at this time. Don’t fall into that trap.”

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This story was originally published in May 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.