When considering paying cash for your second home, you need to think about more than just whether you have the money to cover all the related costs. You also need to keep in mind long-term tax strategies and the economy of the area where your second home will be located. Second-home buyers sometimes view these factors as disadvantages to a cash deal:
* When you file your federal income taxes, you don’t get to deduct the mortgage interest that you paid. You lose out on this key benefit of homeownership. You need to figure out exactly how much money you would save on taxes by taking out a mortgage, and compare that with how much money you would save by not paying monthly principal and interest payments. If calculating this is out of your realm, talk to an accountant or financial advisor who is knowledgeable about the tax benefits of homeownership. She can set you straight as to which is the smarter financial move.
* The value of your new place may depreciate before it appreciates if the home is in an area where home appreciation is stalled or heading downward. If you’re paying cash, make sure your intended home is in an area where appreciation is on the upswing. You’d also be smart to buy where homes are priced below market value and ripe for an increase in value. Talk to a real estate agent to determine which way the market is headed. If he tells you that homes are losing value, consider saving your money and taking out a mortgage.