Financing A Vacation Property
You are not the only one who dreams of owning a mountain retreat cabin or ocean-side condo getaway. It's a good idea. A vacation home can be a luxurious investment that could prove to be a good investment when property values rise. You're not the only one wondering how to make your dream come true. Many potential vacation homeowners are concerned about financing their second home. Let's take a look at the basics of financing your second home.
Vacation Home vs. Rental Property
Different financing methods are used for rental properties and vacation homes. Therefore, before you buy your home away from home, it is important to determine how it will be classified.
A vacation home is typically a secondary residence located at least 50 miles from your primary residence. It shouldn't be any closer than your primary residence. This will make it difficult for you to explain to your loan officer. A vacation home close to your primary residence could indicate that you intend to rent it, which would be eligible for a different type of loan.
If you plan to rent your vacation home out, it will be considered an investment property. This is different from a primary residence or vacation home.
You Are Eligible For A Vacation Home Loan
A second home means a second mortgage. Not everyone can qualify for two mortgages. You will need to meet the income-to-debt ratio requirements to carry two loans. Additionally, you will need to meet stricter requirements to obtain vacation home loans and investment property loans.
Vacation home loans have higher interest rates than loans for primary residences. Lenders may also require higher credit scores and a larger downpayment. Conventional loans allow for down payments of as little as 3% on primary residences. For a vacation home, you might need between 10 and 20%. These types of loans can be a bit tricky because renting your vacation home while you aren't using it could violate your loan terms.
An investment property will likely have a higher interest rate than primary residences or vacation homes. You will need to pay at least 20% down to be eligible for mortgage insurance. Your lender may request a comparable rent schedule. The good news is that your lender may consider some of the expected rent income as income. This could allow you to qualify for a loan you wouldn't otherwise be able to get. You'll also be able to offset the cost of your loan with regular rental income.
There Are Many Financing Options For Vacation Home Loans
You can do a cash-out mortgage refinance
Apply for a Home Equity Line of Credit (HELOC)
This is an option for homeowners with significant equity in their homes. A HELOC allows you to borrow against your equity. A HELOC is similar to a credit card. You can borrow as much or as little as you want, and you can withdraw the funds whenever you need them. If you don't want to refinance your mortgage on your primary residence, this is an option. The first mortgage would remain at its current interest rate, and you could take out another HELOC loan with different terms.
Get a loan for the second house:
If you are eligible for the above loan or have already paid off your first mortgage, you may be eligible for a second loan. This would allow you to avoid refinancing an existing loan. If you have a lower rate, you can keep it.
Get in with your friends:
Financing a vacation property can be costly. Buying a vacation home with family is possible.
