As you consider purchasing a vacation home, the financial decision is as important as the emotional ones. There are plenty of reasons to follow through on your purchase, providing you do your homework first.
It goes without saying that owning a second home implies you have additional disposable income available. For example, the National Association of Realtors (NAR) says that the average second-home buyer has an annual income of $85,900. Look honestly at your own budget—do you have the additional money to pay the mortgage? How is your credit rating these days? These all factor into getting the best financing possible.
There is definitely mortgage money available in this current economic climate. Nevertheless, it is
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Buyer's Tip |
| Beware of higher points and costs if you use a home-equity loan. |
great to be alerted to some of the fine print.
For example, typically mortgage lenders may scrutinize second-home loan applications more diligently than they would for primary-home loans. In addition, the rates and points may be one-quarter to one-half point higher than a comparable loan for your primary residence.
Here are two possible remedies for overcoming financing hurdles. A simple one is to get a second mortgage on your home, which may be quite appealing with today’s interest rates.
A second option is fund part of your purchase with a home-equity loan on your primary residence. While these lines of credit are higher than a mortgage, they can be useful to fill a gap. You would want to limit the amount you borrow in this way, since the limit on tax deductions for home-equity interest is $100,000.
If you are planning to rent your second home, lenders will consider the property investment property rather than a vacation home. In this case, you may need to factor in an additional 1 and half points as well as a minimum of 20% down payment. If you are planning to rent the property when you are not using it, it is important to get comparative rental income. The mortgage lender uses this to determine how much they are willing to lend you, often up to 80% of the rental income stream. In short, while renting your property is an attractive option, there are definite differences in financing a vacation home versus financing a rental/investment property.
Remember to factor in the tax benefits of the second home. Mortgage interest is deductible up to $1 million on first and second homes (not more). And, if you rent your vacation home out for only a short time (15 days) there is no tax on the rental income. (See our article on second home taxes.)
Finally, be mindful of the complications if you decide to purchase your second home overseas. Often these properties require larger down payments, higher rates, and sometimes shorter loan periods.