Select a Lender and Financing Vehicle
1. Ask your real estate agent for a referral to a local lender who finances vacation properties in the area. Compare the lender's terms with those of one or two other lenders in the area, as well as a lender back in your hometown.
2. Request a Good Faith Estimate from the local lender for the financing of a hypothetical vacation home in your price range. This will give you a good idea of the closing costs (up front) that you will have to pay to purchase the property and reassure you, and your prospective lender, that you have the necessary resources to afford a second home in the price range you've targeted. In today's market, I suggest you get preapproval for a loan up to a certain amount, to give yourself an edge with the buyer if the house you are interested in receives multiple bids.
3. Review financing solutions with your lender. Obtaining financing for a vacation home is more difficult than buying a primary residence. Vacation home loans tend to require more money down and carry higher interest rates. This is because buyers are more likely to default on a second home or vacation home than their primary residences if they run into hard times. Underwriters are looking for people with good credit and greater assets than someone purchasing a primary residence, because they know the buyer will be making two mortgage payments.
Generally, for a vacation home, borrowers will have to pay at least 20 percent down to get the best interest rates. Thanks to home equity loans, reverse annuity mortgages, and other financing opportunities, raising money for a down payment and/or securing a mortgage on a second home, however, is easier and less costly than it used to be.
Since you are responsible for paying off two mortgages, your lender may require you to show that you have funds in a reserve (at least two to four months of payments) to cover your payments, in case you are faced with unanticipated financial or other problems. And if you plan to turn the vacation home into a rental property (renting the property for more than fourteen days a year), the lender will treat the purchase
as an investment and charge you a higher mortgage rate (it could be at least 1/4 percent higher).
The type of loan (fixed-rate, adjustable, or balloon) you select will depend on your financial situation and your financial objectives. (Are you looking for the lowest possible monthly payment, or are you more interested in paying off the loan in a shorter period of time? Do you plan to own the house for the foreseeable future or sell it for a profit within the next five years?) Most vacationhome owners take out 30 year or 15-year mortgage loans. But an increasing number are obtaining adjustable-rate mortgages to keep the monthly payments down.
In the vacation market, some households are cash-rich and can pay for their vacation home entirely in cash. This way, they are not burdened with the monthly mortgage costs of a vacation property. But the majority of investor/buyers of vacation homes take out mortgages to finance their home.