People may want to buy or rent vacation homes for a variety of reasons. Despite this notion, we can probably all agree on one thing, which is that mortgage rates are still pretty low when it has been predicted that they were to rise. Because mortgage rates decline or rise on an unpredictable basis, all we can do is hope they will continue to stay low. In the meantime, potential vacation home shoppers should ask the most important questions in order to determine whether it would be smarter to buy or rent.

1.      Will you live in it?

People refinance or obtain second loans with other financing methods all the time. Even if you can afford a vacation home to have as an investment, can you really afford to keep it? Does your income and employment allow you to get away for at least a couple months out of the year? This is a question worth pondering before buying or renting a vacation home.

2.      What is the rental market like?

Everyone questioning the possibility of a vacation home should ask this question, because no area has the same climate for renters, or even buyers. Checking the local real estate is vital, because high vacancy rates in the area is a clear sign that getting rental income whether you are renting or buying is a no-go.

3.      Mortgage rates?

Although 30-year fixed mortgage rates and most below are currently quite attractive, second homes naturally come with drawbacks such as higher interest rates. Another unattractive feature of these property types is the higher costs if you plan to use property income to qualify for the mortgage. As always, research and shopping around will be the key to deciding whether you want to buy or rent out a rental property.

4.      Will insurance be cheap?

While rental insurance is lower than hazard insurance for primary residences, insurance premiums for second homes can be counted as automatically expensive. Seafront property is also automatically subject to have higher hazard insurance costs due to the threats they endure such as floods, high winds, cliff dangers and hurricanes. Rental insurance rates in these kind of areas are subject to this kind of treatment too.

5.      Which areas are the cheapest?

This detail will definitely entail the tradition of shopping around. Doing research on the areas current and past real estate market conditions is crucial. Noticing a high number of foreclosures over the years could prevent you from buying in a super high risked area full of masked investments. Occupancy rates are also an important factor, because some areas around the country are full of absentee owners who have been buying gigantic amounts of properties and artificially inflating the prices.

6.      Is the mortgage interest tax beneficial?

Although second homes may be eligible for the mortgage interest deduction, they do come with a whole line of restrictions that depend on your past mortgage history, and how you intend to use the second home. This area actually requires consultation from a tax advisor because of the variability in the rules depending on the property and area.

7.      Can your household income afford this investment?

When considering a second home that is a rental property, you’ll want to take your personal cash flow as a major variable. While many of the details above focus on specifics on how to determine the affordability of this property type, you’ll also want to consider the utility, other tax costs and property management and maintenance costs when the time comes. Don’t just breeze through this process. Break down your budget with everyone involved and don’t take the smallest costs you have lightly. If you’re going to be struggling to make the monthly mortgage or rental payments, you may be better off sticking with a hotel when you get your vacation time.

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