Tax-code changes, easier financing and baby boomers' wealth are fueling a rise in second-home purchases nationwide. If you choose to buy, remember that your continuing expenses will double, too.

By Marilyn Lewis

The appeal of second homes is universal. Russians have their dachas, Swedes their stugas and Native Alaskans their fish camps. There are 6.8 million vacation homes in the United States -- one for every 11 year-round homes. For many people, the second-home dream has predictable components: golden summer light, kids squealing and splashing, family and friends together, quiet moments, long walks, refreshing naps and time to goof off. Others just want a place to golf or ski, to swim or sail, or simply a change of scenery.

As suburbanites and country mice snap up condos in the heart of the city, urban dwellers are buying second homes in the mountains, near the shore or down a country lane. Thanks to aging baby boomers and changes to the tax code, second-home sales are an increasing share of the real-estate market.

The big bandwagon

The second-home market, which includes vacation homes and investment properties, was a big component of the recent real-estate boom. The National Association of Realtors, or NAR, reports that 40% of all real-estate transactions in 2005 were for second homes; about 12% of all houses purchased were vacation places.

With wealth accumulated from work, home equity and investments, middle-age Americans are transforming rural areas, small towns and resort communities in their pursuit of recreational havens, landing pads for retirement and investments to diversify stock-heavy portfolios. Now, 7% of baby boomers own vacation homes. But middle-age folks from the 77 million-person baby-boom generation aren't the only buyers. Gen-Xers and even 20-somethings are getting second homes.

Still, because of their huge numbers, boomers buy most vacation homes. They are said to be more likely than other generations to own their own homes. An NAR analysis, "Baby Boomers and Real Estate: Today and Tomorrow," says: Boomers hold 57% of all vacation homes.

About 21% of vacation-home owners have two or more vacation properties.

Boomers own 58% of rental properties.

The question is, how do all these people buying vacation homes swing it financially?

The cash option

For a surprising number, the "how" is simple: Pay cash.

A recent NAR-Harris Interactive Poll said 32% of vacation-home owners paid cash, and that 82% of vacation homes are already paid off.

Where do buyers find money for a down payment? The same survey said:

Half used savings.

19% cashed out equity or took sales proceeds from their first homes.

23% used cash from the sale of other real estate.

Little St. George, Utah, population about 65,000, has become a magnet for vacation-home buyers. There, the median price for a house is about $350,000. Real-estate agent David Ellis says St. George's relatively low prices, red-rock vistas and proximity to the Grand Canyon and other parks draw urban refugees, many of whom have cashed out longtime family homes in expensive Southern California markets and beyond.

The recent real-estate slowdown also has affected St. George, but Ellis says vacation homes still are selling well. He estimates that 10% to 15% of his business is in vacation homes, and that about half of all his clients pay cash. "There is a limited number of people who, crazy as it is, are financing their second homes," he says. In fact, homes are selling better in the $1 million-plus end of the market, which includes plenty of vacation homes, he says.

Who has this kind of money? "The largest numbers are coming from Southern California and northern Utah, and there's a pretty strong migration from Nevada," Ellis says. "I've had clients from Michigan, Wisconsin, New York, Florida and Texas -- all over."

The big picture, explains NAR spokesman Walter Molony, is this: The second-home market is driven largely by a 1997 tax-code change allowing a couple to exclude up to $500,000 ($250,000 for singles) in home-sales gains from taxes.

"For the first time, this freed people to make housing choices based on their needs and desires rather than on avoiding that tax consequence," Molony says. Before, the incentive was to trade up. Now, downsizing is popular with boomers selling big family homes that have appreciated mightily. With pockets full of cash equity, many can buy both a smaller home and a vacation house or investment property.

Financing is now easier

Not long ago, when financing second homes, mortgage bankers demanded higher down payments, bigger interest rates and higher insurance fees. Today, says David Hehman, the CEO and co-chairman of EscapeHomes.com, which helps people plan and buy second homes, extra costs have mostly been erased by competition. Some lenders may still charge a one-eighth point extra because lenders see risk in a home that's not constantly monitored by the owner. Still, in years past, Hehman says, a second-home borrower would have paid a quarter- or a half-point extra.

Robert Jangaard, a Whidbey Island, Wash., resident, financed the construction of a recreation home at Lake Wenatchee, near Leavenworth, Wash., a couple of years ago. He and his family escape there to ski, golf and hike in the Cascades. Jangaard says his bank asked nothing special for the second-home loan -- no extra points, fees or bigger down payment. "It's not harder. In fact, it gets easier the more you borrow," Jangaard quipped. "It's all based on how well you know the banker and how familiar they are with your situation."

But, points out Dave Martin, a mortgage banker with First Horizon Home Loans in the Seattle area, you must have enough income to qualify for both your principal residence and your second home, if you are financing both. Martin financed his family's vacation home in Chelan, Wash. He, too, he found no difference in the requirements or costs of the loan.

You will pay more, though, if you will rent out the second home. Investment property, as it is considered, is financed and insured at higher rates.

Tips for financing

For those financing a second home, EscapeHomes.com's Hehman offers this advice:

Apply for financing in the town where you are buying. Bankers there may give better terms because they appreciate the market.

Caution: You'll pay for two of everything now -- new roofs, yard maintenance, appliance repairs. Budget to cover maintenance, property taxes and insurance.

Don't kill yourself financially, especially on a vacation place. "The most important thing is pure enjoyment and peace of mind. That's why you’re buying a second home,” Hehman says.

Try Internet loan sites to get lenders essentially bidding on your mortgage.

The friends-and-family plan

A number of people who can't foot the whole bill are doing what their parents and grandparents had done: going in with family or friends on a vacation home.

The big issue is: How will you share? There are as many ways to divide up the pie as there are ingenious thinkers in the group. By brainstorming and negotiating, invent a system that reflects your philosophies, resources and needs. A strapped partner could throw in more labor than others; older family members with more means might pay a larger share and be spared some of the more intensive chores.

The important part is putting your agreements down on paper. Make contracts to cover financing, maintenance and even how the house will be shared. You can always ease off later if these feel too formal. But tightening up a sloppy, unhappy situation can cause pain and resentment.

And this is your place for fun, remember?