Home Loan For Vacation Home

Should You Buy A Vacation Home

You might be thinking, Why wouldnt I want a vacation home? Having a vacation home can be a great, fulfilling investment. However, like anything else, you need to take some time to go over your financial situation and think about whether investing in a second home makes sense for you.

Lets discuss some of the benefits and drawbacks of buying vacation property.

% Down On Vacation Property

While many lending programs for cabins, bare land, vacation properties, and lake lots can require up to a 35% down payment to make purchasing a possibility, Northview Bank gives borrowers a better option. With a good credit score, buyers can qualify for cabin, cottage, bare land, and lake home financing options that make purchasing possible with only 10% down.

Finance A Vacation Home: Compare Your Options

Ready for your dream vacation home? Youve got plenty of options to finance its purchase just be sure to do your research. Compare and contrast HELOC lenders, home equity loans, traditional mortgage loans, piggyback second loans, or some combination of the above. With the right financing option, you can make that dream a reality!

Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.

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Buying A Vacation Home As An Investment

You may still be able to use your vacation home as an investment property and reap some tax benefits, if you follow IRS rules. You must live in your second home for more than 14 days or 10% of the time that its available for rent whichever period is longer.

There are tax implications if you rent out your second home, depending on how often its rented.

• If you rent out the home for up to 14 days each year, the income may be tax-free.
• If you rent it for 15 days or more, youll have to report the rental income when you file your annual tax return.

You can also deduct rental expenses, such as mortgage interest and maintenance, when you rent your second home for at least 15 days. A portion of your property taxes, utility bills and depreciation may also be deductible. Consult your tax professional to better understand whats at stake they can provide more details and help you strategize your best approach.

Remember to factor in the expenses youll likely incur to maintain your vacation property while renting it out. For example, a professional cleaning service could cost between $50 and $90 an hour an expense youll need to budget for when setting rental rates.

How To Afford A Second Home

A Tea Reader: Living Life One Cup at a Time

• The Bottom Line

The summer vacation season brings joy to many people, but for some, the longing for a year-round second home brings a touch of melancholy. If you are one of those people who would love to own a place for weekend getaways and long lazy vacations in every season, the first consideration should be how to pay for that luxury.

Not all vacation homes are expensive, of course, but even with a relatively affordable second home, you need to make sure your budget can handle the extra monthly payments for the mortgage principal and interest, property taxes, homeowners insurance, and any homeowners association dues. Remember to leave room in your budget for routine maintenance, utility bills, and the possibility of a major repair.

How To Afford A Second Home

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Property Taxes And Hoa Dues

Youll need to pay property taxes on two homes now. Depending on your location, the property taxes for part-time residents can be different than what full-time residents pay.

If you want to live in a subdivision with a homeowners association, youll also pay mandatory membership dues.

Also Read: Rental Property Tax Deductions: A Comprehensive Guide

Where To Buy Vacation Home Property

Looking to buy a vacation home, but not sure where to look? Location can be very important when it comes to vacation property, especially if you plan to rent out the home. The more appealing the location is, the more interested potential renters there will be.

Here are some of the top vacation home counties in 2021.2

Ready to buy your dream vacation home? Dive right in by getting started on refinancing for your mortgage and learning more about how to buy a second home.

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Hire A Real Estate Agent

A real estate agent can make the house hunting process a lot easier. For instance, a good agent can:

• Show you the most relevant properties currently available
• Inform you about houses coming to the market soon
• Help you determine a fair market value for your desired property type
• Tell you what neighborhoods prohibit short-term rentals
• Negotiate with the seller

Ask your family and friends if they can refer you to a real estate agent. You can also interview several agents to get a feel for their personalities, working styles, and level of experience.

Tip:

Thinking About Buying A Second Home Here’s How It Works

A second home can provide a convenient getaway or a source of extra income. It also comes with lots of additional responsibilities and expenses.

Edited byChris JenningsUpdated October 19, 2021

Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

Buying a second home has become a popular option for some Americans, and its easy to see why. Second homes can serve as a private getaway, a source of rental income, or a retreat for friends and family. And, with increased opportunities to work remotely, you could even use a second home as a place to live whenever you need a change of scenery or more space.

Learn more about the benefits and drawbacks of a second home, and what goes into buying one:

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Second Homes Vs Investment Properties: Mortgage Terms And Tax Rules

See Mortgage Rate Quotes for Your Home

A second home is a one-unit property that you intend to live in for at least part of the year or visit on a regular basis. Investment properties are typically purchased for generating rental income and are occupied by tenants for the majority of the year. There are significant differences in the costs and loan qualifying requirements between a second home and an investment property which you should understand before buying another house.

Take Out A Home Equity Loan Or Heloc On Your Primary Residence

Another option is to tap the equity in your primary home through a home equity loan or home equity line of credit to cover your vacation property down payment.

You receive a lump sum when taking out a home equity loan. The interest rate is typically fixed and the payments are made in equal installments, which could make it easier to plan your finances.

With a HELOC, you borrow against the credit line as you need the money during your draw period, then make principal and interest payments when that period ends. Similar to credit cards, HELOCs have variable interest rates and you pay interest only on what you owe. This can be a viable option if youre working with a lender who doesnt offer home equity loans or if the vacation property needs repairs or upgrades over time.

Like a cash-out refinance loan, you cannot deduct the mortgage interest paid on a home equity loan or HELOC unless the money is being used to buy, build or substantially improve the home thats securing the loan.

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Is It Wrong To Claim Your Investment Property As A Second Home

It may be tempting to claim youre buying a home as a second home when you intend to rent it out to avoid a higher interest rate and down payment requirements. However, lenders consider this “occupancy fraud” and it could lead to an FBI investigation and hefty fines.

Youll typically sign an “occupancy affidavit” at closing, which gives the lender the right to foreclose on your loan if they discover you intentionally misrepresented the use of your property. Many mortgage companies use high-tech digital verification systems to search for evidence of mortgage fraud. Others schedule random site visits to confirm who is actually living in the home.

Gather Quotes From Multiple Local Lenders

You might find more affordable loan terms by working with a mortgage lender thats local to the area in which youre buying a vacation home. Get home loan quotes from three to five lenders and compare interest rates and loan terms.

Ask each lender for a worksheet of cost estimates. Pay attention to the estimated mortgage rate, lender fees and other closing costs. Follow up on any line items you dont understand and try to negotiate lower fees where you can.

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On The Road To Buying A Second Home Let This Be Your Go

According to our research, nearly three-quarters of people planning on buying a vacation home expect to use either cash or a conventional loan.* But thats not where your options endthe vacation rental industry is growing so quickly that some lenders are creating new vacation rental loan products.

Whether this is your first vacation home or your fifth, its a good idea to go through a couple of different loan scenarios with your vacation rental lender. There are several levers to pull, so you can make the most informed and rewarding investment. Well help start you off on the right footheres our guide to the major vacation rental mortgage loan options.

Is It Hard To Get A Mortgage For A Vacation Home

Vacation homes offer homeowners a place to escape where they have 100% control. In addition, vacation homes can often pay for themselves or even generate extra income if you can rent them out. Getting a mortgage for a vacation or second home is different from getting a mortgage for a primary residence. Most lenders will require borrowers to have immaculate credit and intention to spend at least part of the year at the second residence. In addition, lenders may require at least two months of reserves.If you plan on taking a second mortgage for a vacation home youll need to confirm borrower and property requirements with the lender. You should also be prepared to pay higher interest rates compared to your primary mortgage. While vacation homes may have lower interest rates than investment property, they typically have higher interest rates than primary mortgages.

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Three Ways To Finance A Second Home Purchase

If youre thinking about buying a second home this year, there are a few different ways you can fund the purchase.

You may not even have to take a loan out on the second home.

These are the most popular methods of making a down payment or paying cash for a second home.

1. Use a cashout refinance on your primary home

Home values are rising across the country, with sales prices hitting record highs in some areas.

Many homeowners have built substantial equity in their primary or rental residence in just the past few years. They can tap into this equity via a cashout refinance.

For example, say a homeowner owes $100,000 on their mortgage, but their home is now valued at $200,000 due to appreciation. They could withdraw some of the equity by refinancing into a bigger loan and taking the difference in cash.

In this case, the borrower would have access to a substantial down payment on a second home:

• New loan amount: $160,000
• Closing costs: $3,000
• Available cash: $57,000

Borrowers who have good credit could borrow up to 80% of their homes current value with a conforming loan. Other loan types allow an even higher percentage.

For example, veterans may have access to 100 percent of their equity if they use a VA cashout loan.

Todays low mortgage rates may allow borrowers to drop their rate while taking a cashout refinance. Some homeowners could even come out with a similar payment on a bigger loan amount thanks to a lower interest rate.

Can You Finance A Vacation Home

Yes, you can finance a vacation home. In most cases you will need 10% to 20% down and excellent credit. If you cannot qualify for a vacation home loan you should look into a personal loan. Most lenders offer personal loans up to $100,000 and the funds can be used however you would like. If you qualify for a personal loan and the loan amount is high enough to purchase your vacation home this could be a good alternative. Most personal loans are offered with terms up to 12 years and interest rates starting at 4.99%.

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Capital Gains And Second Homes

Taxes once again become an important consideration when homeowners decide to sell their properties. According to current tax law, homeowners can realize up to $500,000 in profit, tax-free on the sale of their primary residence. Known as the primary-home exclusion, it cannot be applied to the sale of second home.

The standard sale of a secondary residence will result in taxes being owed on the entire profit realized from the transaction. However, there are some legal ways to maneuver around the second home capital gains tax.

If the owner adopts their second home as primary residence for at least two years before they decide to sell the property they may be able to qualify for the standard deductions. Commonly known as the 2/5 year rule‘, this exception can offer homeowners a way to sell their second homes and still avoid paying the full weight of the capital gains tax the same year.

Be sure to consult with a trusted professional before making a financial decision.

Real Estate Appreciation and Secondary Residences

Real estate has always been considered a good investment and a way to consistently build wealth. It holds true for both primary residences and working rental properties. While the real estate market is always prone to fluctuations, sound property investments tend to remain valuable assets for their owners over almost any measure of time.

Be Prepared for Volatility

When it comes to second homes or, more particularly, vacation properties, the playing field changes.

Buying A Second Home That Will Be Your Primary Residence

One very important thing to note is that a property cannot be listed as your primary residence and your second home at the same time. The criteria differ for each category. A second home is typically defined as a home you would live in for some part of the year. Unlike a primary residence, you do not have to live there for most of the year, and it doesn’t have to be close to where you work. Vacation homes are perfect examples of second homes. They fit the category of being a place you only live in for some part of the year, and they also do not count as investment properties.

There are a few types of loans that can’t be used to buy a second home. For example, you can’t use an FHA loan or a VA loan to purchase a second home. There are also some financial considerations that come into play when you are being evaluated for a second home mortgage. A notable example of this is that most lenders are stricter with the debt-to-income ratio of the buyer as well as their credit score. Affordability, location, and maintenance are three crucial things to consider when you’re looking to buy a second home.

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Tax Benefits Of Second Homes Vs Investment Properties

The tax benefits of a second home are very different from those associated with an investment property. The table below shows important differences:

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One important reminder about the 2018 tax rule changes: You can only deduct mortgage interest for up to $750,000 worth of total mortgage debt, including loans on primary residences, second homes and investment properties. However, that limit increased to $1 million if the property was purchased prior to Dec. 15, 2017.

Its always best to consult with a tax professional to get tax advice to maximize the tax benefits of your second home or investment property.

Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Will You Be Using This Residence Regularly

This is an important factor because how you claim the property could have an impact on the type of loan you can qualify for as well as tax implications. If its going to be your primary residence, then standard loan options would apply.

If its a second residence, and you need to take out a loan to purchase it, keep in mind that lenders wont let you rent out the property. If you are using this as an investment property, then the loan options are a little different. Generally not quite as friendly, but with the potential rental income, it could be a solution that works.

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