(MONEY Magazine) – The American dream once meant owning the house where you lived. These days, for 10% of American households, it also means owning a place where you can escape from it all. And why not? What's more alluring than the thought of dipping your toes in a crystal lake a few feet from your second front door? Or strolling on the beach below your rural sunporch? Or relaxing before your fireplace after a day on the slopes?

Now is a great time to make that dream a reality. Because price appreciation has barely kept ahead of inflation in most areas during the past three years, vacation homes are still very afford-able. Moreover, some of the most important costs of ownership have actually dropped in recent years. Most mortgage lenders have stopped charging interest rates up to three-quarters of a percentage point higher for second homes than for first ones. And some big insurers are lowering policy premiums on second homes, which in the past have cost as much as 25% more to insure than com-parable primary residences. No wonder that a 1995 survey by the American Resort Development Association, a real estate trade group, found that about a third of Americans not only want to buy a second home in the next 10 years but also believe they have at least a fifty-fifty chance of doing so. That's more than double the percentage found in a similar survey five years earlier.

The time to start making your move is now, before baby boomers inflate the prices of vacation homes the way they did those of primary homes in the 1970s and 1980s. Most of today's buyers are either boomers or Americans in their mid-fifties to early sixties who plan to live in second homes at least part of the year in retirement, according to John Tuccillo, chief economist for the National Association of Realtors. As baby boomers begin to swell the ranks of those pre-retirement buyers, forecasters say, second-home price increases will accelerate. Indeed, in the ski resort town of Snowmass, Colo., for example, prices have already gone up an average of 19% in the past year.

In most vacation havens, however, second homes remain affordable: as low as $100,000 or so in some areas. Prices are quite variable, of course; you'll pay up to twice as much for a house on the water, say, than for one a couple of blocks away. Conversely, condos often cost 15% to 20% less than houses in the same area. And homes in resort areas on the coasts tend to cost up to twice as much as those in the middle of the country. (For 10 resort communities where you can find particularly attractive vacation-home buys for $250,000 or less, see the table on page 168.)

If you buy now, you can also take advantage of favorable developments in the costs of owning a second home. Until the early 1990s, mortgage lenders--fearful that mortgages on second homes posed a higher default risk--charged interest rates that were a quarter to three-quarters of a percentage point higher for second homes than for primary residences. That could add as much as $80 to the monthly payment for a $160,000, 30-year, 7.75% fixed-rate mortgage. No more. A March survey conducted for MONEY by financial researcher HSH Associates shows that more than 90% of lenders in the 11 states with the most vacation homes charge the same rate for first-home mortgages as for second-home loans.

The insurance picture looks brighter too. Traditionally, a second home costs up to twice as much to insure as a first home. That's because second homes are empty much of the time, leaving them more vulnerable to burglaries, fire and other risks. But in the past couple of years, big Warren, N.J.-based insurer Chubb has been slashing its second-home premiums in 13 states that contain lots of vacation homes. (Chubb plans to do the same in the rest of the country in the next two years.) Chubb's rationale: Most people have fewer and less valuable belongings in their second homes than in their primary residences. So the insurer's plan offers lower than usual coverage levels on those items in return for an annual premium bill that might run $700 a year, vs. $1,000 for a primary residence. Other insurers are expected to follow Chubb's lead.

Of course, you can cut your carrying costs on a second home even more by collecting income from renting it out for part of the year, as approximately a third of second-home owners do. If you expect to rent, decide before you buy how often you plan to do so. That's because if you rent out your new vacation property almost all the time, both mortgage and insurance costs will be higher than they'd be otherwise.

If you and your family stay at your vacation home fewer than 14 days or 10% of the number of days it's rented, it will be considered a rental property, not a second residence. Mortgage rates for rentals are as much as three-fourths of a percentage point higher than for regular second homes, and insurance bills are higher too. Tax breaks partly offset those costs, however: You get to deduct not only interest charges but also repair and other maintenance costs. And, of course, you collect all that rental income.

If you'll rent out your home for fewer than 50 weeks a year but more than two, you can deduct some of the repair and maintenance costs (consult your tax adviser for details). You can deduct real estate taxes and mortgage interest so long as your mortgages on your first and second homes do not total more than $1 million. The easiest route is to rent out your place fewer than two weeks a year. In that case, you need not pay tax on the rental income you collect.

Here are more key tips to make you a savvier second-home buyer.

--Be ready to part with a chunk of cash up front. While mortgage rates for second homes have come down recently, strict down payment requirements have not. The HSH survey shows that 38% of lenders still require a higher down payment for a second home than for a first one--typically at least 10% and often 20%. And government programs that can cut down payment requirements on first homes to 5% or less don't apply to second homes.

--Favor properties within a three-hour drive of a major metropolitan area. A home that's close enough to make a practical weekend getaway will reduce the wear on your car and your psyche. It will also increase your chances of renting the property and eventually reselling it profitably. Among the communities that meet the reasonable-drive test are Rehoboth Beach, Del., which is less than three hours from both Philadelphia and Washington, D.C., and ski resort Steamboat Springs, Colo. (pictured at left), about three hours from Denver.

--Look for water, snow or other attractions. Activities like skiing, hiking, boating and fishing will not only keep you entertained but will also draw renters or buyers. Nearby restaurants, movie theaters and other entertainment for adults and kids are pluses too.

--Choose an area that's popular year round. If vacationers throng to your area all year long, rental and resale prospects rise. For example, Big Bear Lake, Calif., in the mountains about 100 miles east of Los Angeles, features skiing in the winter and fishing and boating in the summer. As a result, the value of properties sold there dropped only 3% to 5% in the past three years (see the table below) in the lingering aftermath of the early-'90s California recession. By contrast, the value of desert getaways in Palm Springs, which is popular from November through May, fell a whopping 10% to 20%.

--Consider a condo rather than a house. While 62% of prospective buyers prefer a house to a condominium, according to the American Resort Development survey, a condo's advantages can be compelling. For one thing, a condo can cost 30% less than a comparable single-family house. For example, a two- bedroom house in Old Orchard Beach, Maine with a direct ocean view typically runs $200,000. But two-bedroom condos with views of the harbor are available for just $140,000.

Hassle is low too. You can leave yard work and maintenance of everything outside your apartment to the condo association. Such services aren't free, of course. In addition to your mortgage payments, you'll owe monthly condo fees that range from as little as $50 to as much as $500 in luxury units. But owners of single vacation houses also have to pay for maintenance services, such as cutting grass, raking leaves and simply checking the house periodically to make sure all is well.

--If you might rent your property, consider the logistics. Some condo complexes have rental offices that will interview prospective tenants at no extra charge beyond the condo fee you pay. Or you can hire an independent real estate agent who typically will charge 10% to 30% of the monthly rent to find tenants and do minimal maintenance.

--Look for the right living space. Tastes vary widely, of course. But consider holding out for a home with an open design that allows people in the kitchen to converse with those in the family room--one feature that both renters and home shoppers crave. Also look for a home that has at least two bedrooms; it will be much easier to rent than a smaller dwelling. Finally, buy a home with ample storage space to stow your personal possessions out of renters' way.

--Budget several thousand dollars for furniture. If you plan to rent, "your furniture needs to be appealing but bulletproof," counsels Claire Walter, co-author with Ruth Rejnis of Buying Your Vacation Home for Fun and Profit (Dearborn Financial Publishing, $19.95). "People won't be satisfied with a place that looks like a 1956 motel." If you're in a rush, look for readymade furniture packages, offered by many furniture stores in resort areas. For instance, the Mountain Comfort Furnishings store in Vail, Colo. will provide new furniture for an entire two-bedroom condo for as little as $6,900.

--Factor in insurance costs before you buy. Your second-home insurance cost may double if you choose a remote location more than five miles away from the fire department, for example. If you buy property in a low-lying coastal area, you may be required to carry special federal flood insurance that can add $500 to $1,500 to your annual insurance bill.

--Consider renting out your place during part of the high season if you're after maximum rental income. If you own a typical two-bedroom condo near the ski slopes in Telluride, Colo., for instance, you might make as much as $3,000 by renting it in February, compared with $900 in July.

--If you like an area, rent for a season or two before you buy. Spending one or two weekends in a mountain or beach town when the weather is perfect doesn't give you a real feel for the region. Renting will let you see if you really like the area, even when there is no sun or little snow. (For tips on finding a last-minute rental for this summer, see the box on page 169.)

--Pick a home you love. Even if you plan to rent out your second home much of the time, your overriding concern should be whether it will make you and your family happy. A weak economy or other problems could prevent you from collecting all the rental income you expect. But if you own a place you love, nothing can deprive you or your family of the pleasures of a great getaway.

REPORTER ASSOCIATE: Roberta Kirwan