A recent Harris Interactive Poll conducted for financial services provider Principal Finance Group, indicates that many retired or soon-to-retire baby boomers are experiencing unease about their long-term financial situation.

Among those still working, the survey found some of these fears include whether they will be able to maintain the quality of life, ability to afford medical care and inflation reducing their purchasing power.

Poll results indicate that retirees share many of the same fears as those still in the workforce. Added to that list, 21 percent of retirees in the survey expressed concern about being able to afford the basic necessities of life.

Acting as a damper on some of these concerns, many retirees own their homes outright, giving them access to lots of equity. Reliance on this equity, rather than savings, could make some of these retirees financially vulnerable, especially if they intend on continuing to live in their current home (73 percent of those surveyed).

For baby boomers still working, the poll reflects that only 65 percent own their primary residences. Poll results indicate that among this group, 65 percent hold a 20 percent or smaller equity stake in their homes.

For more details on this poll, see this article, VIA Realty Times.

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The U.S. mortgage market is going though a period of dislocation related to the increasing level of loan defaults, particularly on so-called sub-prime loans. While it started in the sub-prime market, the difficulties there have begun to bleed over into the regular mortgage market. As a result, formerly solid lenders, such as Countrywide (the nation’s largest residential lender) have begun to experience credit crunches of their own. Countrywide has resorted to issuing high-rate CD’s to raise capital to allow them to continue to write new mortgages. And this is on top of the firm having to tap into a nearly $12 billion dollar credit line last week

What impact will this tightening of credit markets have on borrowing for vacation properties? It’s likely that those lenders with funding problems in the primary residential market will lower the amount they are willing to loan of second homes.

If you are planning to buy a second home soon, be aware that loans for action homes may be harder to come by and the ready availability of home equity on your primary residence to finance such a purchase may also be tightening.

You will find further details on this subject at AllBusiness.com.

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There has been a lot of mention in various media of the impact of the baby boom generation on the economy. Bob Waun, of Vacation Finance, has written an article that outlines the demographic facts about the boomers and how they will impact the second home market in years to come.

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Often in a buyer’s market homebuyers will try to get the absolute rock-bottom price on a home they are purchasing. While this sounds like common sense on the surface, you might actually be doing more harm than good.

So, right now you’re probably thinking, “What?!? Are you crazy!?! Of course I want to get the lowest possible price!”

Hear me out: Home prices are set based on comparable home sales in a given neighborhood. If the lowest comparable home sold for $250,000, and the highest sold for $400,000, then the median comparable home price is $325,000. Now, if you purchase a comparable home in the area for $205,000, you’ve just lowered the median price to $302,500, which is a 7% decrease in the median home value. That means that every other comparable home that goes on the market is going to be looking at the new, lower median price, and homes that are currently on the market are going to be encouraged to lower their prices to be comparable with your new home’s selling price. This can create a nasty downward spiral in a given neighborhood that can take a long time to correct (sometimes years).

Now, this doesn’t sound like a big deal, until you consider that eventually you’re probably going to sell your new vacation home. Or, even if you don’t sell it, maybe you want to take out a home equity loan to do some improvements. When the appraiser comes to value your home a few years after you purchased it, he comes back with a value of $225,000. Hey, you didn’t lose money. But then you start to think about all the improvements you’ve made and how you know you’ve put at least $20,000 into the place, and after all, it’s been five years, it should have gone up by at least the inflation rate (which would put it at around $249,000 over five years at 3%, not including the cost of improvements). What happened?

Well, after you bought your house for $205,000, other homes that were for sale lowered their prices. Pretty soon, the highest comp in the area was only $360,000, and the lowest was $190,000, making the median price $275,000. Now, even as homes in the area started to creep back up in value as the overall market improved, it was slow going.

Now, let’s say that you had paid $250,000 for your home. It’s on the low-end of comparable properties, but it didn’t throw off the median price. Property values continued to creep up at just over inflation (let’s say 4%). When the appraiser comes in to value your home after five years, your home’s value is now $305,000, even without improvements. That means that you now have $55,000 extra in equity. Considering that you spent all the equity you had gained in the previous example on improvements, even given the higher purchase price, you’re still $10,000 ahead of where you would have been with the lower price.

And, since you’re a savvy buyer and realized that it was a buyer’s market, you negotiated $15,000 worth of improvements to the property that the seller completed before you closed on the home. This means that you can effectively add another $15,000 value (plus appreciation) to your home. So, you’re really coming out on top. Give it another five years at the same appreciation rate and the value is now over $370,000, giving you an additional $65,000 in equity.

In the first example, even if after five years it appreciates at 4% per year for the next five, your value is still only going to be around $273,000, almost $100,000 worse off than if you had paid the higher price in the first place.

While on the surface getting the best price might sound like the way to go, in reality, it can harm your financial situation in the long run. This can be even more true with properties that you’re holding for investment. Unless you’re in a market that’s experiencing a solid upswing, and are planning on doing a lot of improvements in a property before reselling, getting a price significantly lower than comparables in your area could well do more harm than good. Instead, get the seller to throw in other incentives, such as improvements or prepaid mortgage interest. That way you’re still getting a great deal without harming the overall market.

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Once you’ve found the perfect second home, had your appraisal and inspection done and have your financing in place, you’re in the clear, right?

Not necessarily.

There are plenty of things you can do at that point that could seriously jeopardize your financing. Here are some of them (and, if in doubt, ask your lender):

1. Don’t change jobs. Even if you have another job in place before you leave, don’t leave your current job until you’ve closed on your mortgage.
2. Don’t move your money or long-term investments around. Keep things the way they are until after the closing. Moving money from your savings to checking or vice versa could, at the very least, slow things down if you end up needing to re-submit paperwork with your lender.
3. Don’t co-sign for anyone else on a loan. This shows up as a new loan or line of credit on your credit history.
4. Don’t let anyone run your credit report again. Too many inquiries on your credit report could signal to a bank that you’re over-extending yourself, or at least trying to. Don’t let any other lenders run your credit report until after your closing.
5. Don’t forget to lock in your interest rate. Request written confirmation of your rate prior to your closing date, so that you don’t have any surprises. Just because your financing is in place, doesn’t mean that your interest rate is locked in unless you have a guarantee - in hand, in writing.
6. Don’t finance any other big purchases. Anything that changes the amount of debt you have or have available to you (including new credit cards) can impact whether or not you still qualify for your mortgage. Even if you don’t lose your mortgage, it could impact the rate you pay.

These tips are meant as a guide, and there are surely other things that you should be aware of when taking out a mortgage to purchase your second home. For more information, talk to your mortgage broker or loan officer.

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