With favorable appreciation rates, low interest rates and Wall Street in the grip of a bear, a second home is an appealing investment right now. Deciding what mortgage you'll need to swing the deal, however, isn't quite so clear.

The Office of Federal Housing Enterprise Oversight's Second Quarter House Price Index says the nation's housing market has enjoyed a nearly 39 percent rate of home price appreciation since 1997, with more the half the states and the District of Columbia enjoying a 5 percent growth in price appreciation during past year.

Second home values jumped 26.8 percent since 1999, according to the National Association of Realtors (NAR).

In Freddie Mac's Primary Mortgage Market Survey, the 30-year fixed-rate mortgage (FRM) averaged 6.05 percent, with an average 0.7 point, for the week ending September 20, 2002. This is the lowest the 30-year FRM has been since Freddie Mac began tracking it in 1971.

On Sept. 24 Bankrate.com put the fixed rate even lower -- at 5.76 percent.

Meanwhile, the DOW Jones average has plummeted more than 29 percent since the end of 1999.

"Regardless of whether or not bubbles occur in given areas, housing has still generally been a good long-term investment," OFHEO reported.

While it may be a no-brainer deciding where to put investment dollars these days, determining what kind of mortgage to use takes a bit more gray matter.

First, consider your plan.

"Do you plan to 'fix and flip', rent it out, or sell the property to another investor? Subtle differences in your loan could cost or save you thousands," says Las Vegas real estate investment specialist Darrell Evans, a real estate agent with Green Lockett Realty.

Consider the variables.

"Which loan is best? It all depends upon your personal financial position, how soon you pay off the loan, either by refinancing, selling or cashing out, and it depends upon what happens to interest rates over this period of time," said real estate investor Richard Calhoun, who is also broker owner of Creekside Realty in San Jose, CA.

And then consider your options.

Your options are also limited by income, down payment and creditworthiness. Owning an existing home, for example, is likely to push your second home loan cost up by about an extra point and a half.

A mortgage broker or lender can help you compare and contrast loan programs, but you will also need a financial or investment counselor and a tax professional to sort through the complexities.

A real estate investment is a highly leveraged investment. To cash in, relatively little up front money, in the form of a down payment, is required.

Greater leverage can come with a smaller down payment, especially in fast-appreciating markets where you plan to sell or trade your property in a few years.

"If I was buying today and not concerned about a monthly cash flow and turning the property over in a couple of years, I'd be all over 5 percent down. Even though I'd have the private mortgage insurance, it would be tax deductible to some extent," said Evans.

However, don't neglect to consider that the tax write off isn't always a sure thing.

Marie Sternberger, a Sunnyvale-based enrolled agent, says deductible passive losses are limited to $25,000 and that's phased out if your modified adjusted gross income (AGI) reaches $150,000. At a modified AGI of $100,000, your permitted deductible passive losses are halved and phase out more until you reach the $150,000 level.

Lower down payments also can be a better deal for working investors.

"If you make a large down payment on an investment property, it's more likely to produce a taxable profit, which isn't great for people during their working years. It's taxed as ordinary income," said New England financial counselor Eric Tyson, who is also author of "Investing for Dummies" (John Wiley & Sons, $19.99).

Unfortunately, low down payments may not get you the lowest interest rate. The less you put down, the higher up the interest rate goes, says Roger Harrington, a mortgage consultant in St. Paul, MN.

You can also leverage your investment with an adjustable rate mortgage (ARM), interest-only mortgage or even negative-amortized mortgage. Such mortgages are typically best for short-term investments. Otherwise, you risk rising interest rates or a growing principal, either of which can eat into your return.

"It's less risk if you get 3-year fixed or a 5-year fixed," said John V. Pinto a real estate broker and investor in San Jose, CA.

Harrington says less risky, fixed rates are at historic lows and if you've got the extra cash a larger down payment is one of the best ways to invest the cash in today's market.

"If you can do better somewhere else by not putting more money down, okay, but when you have enough money to go in and get a reasonable deal and avoid PMI and avoid future trauma it's hard to pass on the rates as low as they are right now," Harrington said.

Published: September 25, 2002

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.