If you thought getting a mortgage for a primary residence was difficult, it can be even more challenging to obtain one for a vacation home. To you, a second home conjures up images of vacation fun and relaxation, but lenders see only risk. They assume that vacation-home buyers are extending themselves financially, making them more likely to default on the loan. Read more about Choosing a Mortgage Loan.
And that risk is passed on to borrowers in the form of higher interest rates — as much as 0.5 percent higher than primary-residence mortgages. Mortgage insurance rates will also be higher, and you will have to prove that you have more available cash on hand. For example, if you are expected to have two or three months in mortgage payments available in cash for a primary residence, you’ll likely need five or six months of available cash for a vacation home.
Loan amounts will also reflect the higher risk taken by the lender. While banks and brokers routinely issue first-home mortgages with just five percent down, lenders will likely require 10 to 20 percent down for a vacation-home loan. If you’re planning to rent out the property, that will further increase the risk to the lender, which will probably result in an even higher down payment.
Some buyers choose to forgo a mortgage on their vacation home altogether, and take out a home equity loan on their primary residence to make the purchase. While this saves them the trouble of applying for another mortgage, home equity loan rates are usually higher than mortgage rates. And taking out a home equity loan requires that you put your primary residence up as collateral, so you could conceivably lose your home in the event of serious financial difficulty. Get the Lowdown on Home Equity Loans.
Despite the drawbacks, however, vacation home sales have increased dramatically in recent years. Florida, Colorado, Arizona, California, and Hawaii are among the favorite choices of vacation home buyers. If you’re considering a vacation home in one of these states, or in any area where second-home buying is common, you may get a substantially better deal on a vacation-home mortgage. Lenders in these areas are familiar with the particulars of vacation homes, and must compete with other banks and brokers for their share of the market.
Once you find a vacation property you like, consider what you’ll do with the property when you’re not using it. Many owners choose to rent out their vacation homes, and this has both benefits and drawbacks. The rental income will certainly be welcome, but you’ll also have to consider how you’ll clean and maintain your property. If you plan to rent it out, you may have to disclose this to your lender, and you’ll certainly want to inform your insurance company, and purchase coverage accordingly.
If you’re using the house for just part of the year, make sure to address all maintenance concerns, taking steps, for example, to prevent freezing pipes in the winter months when you’re away from your summer home. A vacation home can be wonderful, but there is also a lot of planning that goes into buying and maintaining one.