Vacation Home Vs Timeshare Or Airbnb
Most buyers interested in second homes are looking for the perfect vacation spot. It might be the mountains or it might be the beach, but the majority of buyers are essentially looking for a home away from home where they can holiday with their families.
So, does it make sense to purchase a second home or is investing in a timeshare a better option? Ultimately, it comes down to individual choice. Either option has its positives and negatives, and no easy answer will suit all buyers.
If you’re looking for a real home away from home, where you set the rules and everything is always as you like it, then purchasing a vacation property is probably the better choice. As a second home the property will belong to you, and you have total control over how it’s maintained and who has access.
Of course, you also have total responsibility for its upkeep as well as all expenses associated with owning and maintaining the property. Still, a second home can be a valuable asset and if natural real estate appreciation works in your favor, owning a vacation property can certainly help you to build up your personal wealth.
Of course, you’ll be limited in the amount of time you can spend there, and the calendar dates may not always coincide with your family’s desired plans, but it is still, much less of a financial and emotional investment than purchasing a second home.
Can You Do A 1031 Exchange With A Vacation Home
Yes. If you already own a vacation rental property, and you want to sell it and trade up, consider a 1031 exchange. Put simply, a 1031 exchange is IRS-speak for swapping one income property for another. Its a unique tax benefitwith some specific requirementsthats becoming more common in real estate deals as property owners increasingly look to trade up for vacation homes.
Cost Of Mortgage Loan Insurance
The fee you pay for mortgage loan insurance is called a premium. Mortgage loan insurance premiums range from 0.6% to 4.50% of the amount of your mortgage. Your premium depends on the amount of your down payment. The bigger your down payment, the less you pay in mortgage loan insurance premiums.
Find premiums based on the amount of your mortgage:
You can pay your premium by adding it to your mortgage or with a lump sum up front. If you add your premium to your mortgage, you pay interest on your premium. The interest rate is the same rate as youre paying for your mortgage.
Ontario, Manitoba and Quebec apply provincial sales tax to mortgage loan insurance premiums. Your lender cant add the provincial tax on premiums to your mortgage. You must pay this tax when you get your mortgage.
Down Payment On Your Primary Residence
Down payment requirements for your primary residence, or main home, can vary.
Conventional Loan: Conventional loan requirements for primary residences are totally up to the individual lender. Some lenders might require you to have 5% down, while other lenders may only require 3%. If you have a credit score thats above 620 points, your lender may give you access to lower down payment loan options.
FHA Loan: With an FHA loan, youll need a down payment of at least 3.5%. To be able to put down the minimum 3.5% FHA down payment, youll need a credit score of 580 or higher. If your credit score is between 500 and 579, youll be required to put down at least 10%. The minimum credit score required by Rocket Mortgage® is 580.
VA Loan:You dont need a down payment to qualify for a VA loan. There are specific length-of-service requirements that determine your eligibility, and your discharge reason also plays a role. You can view complete service requirements for the VA loan program on the Department of Veterans Affairs website.
If youre the spouse of a military member or veteran who died in service or from a service-related disability, you may also be eligible for a VA loan. Full eligibility requirements for spouses are also available on the VA website.
Reserve Payments: 2 To 6 Months Worth
At a minimum, youll need enough money in the bank to cover a few months worth of principal and interest, hazard insurance, real estate taxes, and, if applicable, homeowners association dues.
On a vacation home, lenders require you to have two or 12 months worth of cash reserves depending on your down payment, credit score, and debt-to-income ratio. For an investment property, its six or 12 months worth.
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Can You Truly Afford To Buy A Second Home
First things first, youre going to need to make sure you can afford a second mortgage. At this point, you wouldve ideally paid off your first mortgage fully, or at the very least made, consistent, timely payments. Moving forward, there are some new numbers to which you should pay extra attention to.
Second mortgage interest rates on average tend to be about a quarter of a point to a half a point higher than the interest rates on first mortgages. Youll have to prove to the bank that you can cover both your first and second mortgages with money to spare.
In the days before the Great Recessions housing crisis, it was easier to leverage a first home purchase to finance a second home. These days, lenders are more conservative when deciding whether to issue loans for secondary homes. In the grand scheme of things, though, the interest on your mortgage is just a part of the overall view of things. Keep in mind that down payments on second mortgages tend to run from 10% to more than 20%.
Finding The Right Fit
There is much to consider before purchasing a second home or vacation property. While real estate is almost always a good investment, vacation properties are far from a sure bet.
Demand for real estate in core urban markets can remain relatively strong even through recessions because people still need to live near where they work, whereas real estate in getaway markets can be more volatile in down markets.
If you are considering the purchase as a financial investment, it is best to tread carefully and research the property fully before taking on what could be an expensive second mortgage. Be aware that a hot market today, may not remain so tomorrow.
Consider Political Risks – Especially if You Are a Foreign Buyer
Political winds change and in troubling times real estate can be an appealing asset to tax aggressively given its lack of mobility. In 2020 Californias vote on a partial repeal of the 1978 Proposition 13, though initially the repeal would only apply to industrial and commercial properties.
When markets get overheated local politicians may also decide to place additional transaction or vacancy taxes on foreign owners, so it is usually best to invest in your home country unless you are explicitly buying a bug out spot.
That being said, a truly solid second home or rental property makes a secure financial investment provided you have the needed liquidity to survive market turbulence.
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Using A Refi Or Heloc For A Vacation Home Down Payment
How do so many people afford to put so much money down toward a vacation home? The answer might be existing home equity.
A popular option is to use a cash-out refinance on their primary home to fund the down payment on a vacation home. This is viable if you have built up enough equity either through payments or home value appreciation.
You can also use a home equity line of credit to make a down payment. The advantage of a HELOC is you dont need to refinance your current mortgage, so its a bit easier and quicker to complete.
Second Home Mortgage Rates
Second home loans have only slightly higher interest rates than first home mortgage loans.
As with your main home, it pays to shop aggressively for your best mortgage rate.
Compare offers from at least 35 different mortgage lenders, and remember to look at their fees and annual percentage rate as well as the quoted mortgage rates.
To make sure you qualify in the first place, take a look at your assets, credit, and income like an underwriter will.
Youll have the best chance at a low second home mortgage rate if you pay down outstanding debts and get your credit score as high as possible ahead of time. A bigger down payment of 25% or more can help you get a lower rate, too.
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Fannie Mae Second Home Guidelines And Second Home Financing Requirements
Just meeting conventional mortgage lending guidelines and having the 10% down payment on a home purchase does not guarantee that a second home buyer can qualify for a second home mortgage loan.
- Fannie Mae and Freddie Mac have specific rules and requirements with second home financing requirements
- The second home purchase needs to be at least 100 miles from the primary home of the second home buyer
- A second home purchase that is just a few miles away cannot qualify for second home financing and can only qualify for an investment home financing
Again, most second-home buyers will greatly benefit from the rates and terms and the minimum down payment requirements of second home mortgage loans than investment home mortgage loans.
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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You Don’t Need Contract For Deed To Buy A Cabin
It can be difficult to save for a downpayment on a cabin, lake home, or plot of bare land for hunting or future cabin construction. Many financing roadblocks cause people to enter into less-than-ideal financing arrangements. Contract for Deed can be a good financing arrangement for people in certain scenarios, such as when a bad credit score makes vacation property an impossibility, but it is rarely ideal for both parties. With 10%-down programs from Northview Bank, you have more options for buying vacation property.
10% Financing for Vacation Property
Whats More Important: Your Down Payment Or Mortgage Payment
You might be wondering what matters more your upfront payment or your monthly financial obligation on a home. The reality is that they are both important, and one impacts the other. The more you can put down, the smaller your monthly payments will be. However, making a small down payment isnt necessarily a bad move. While youll need to spend time saving up for that big down payment, thats a one-time cost. Your mortgage payments are going to happen every month perhaps for the next 30 years. So, do the math to make sure you can afford that recurring bill while paying other bills and saving for the future.
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Down Payment For Vacation Home: Requirements For Buyers In The United States And Canada
Whether you have managed to save up a significant down payment or you are just starting to save, you may be wondering what the typical down payment for a vacation home is. After all, it can take substantial time and fiscal discipline to save up enough to purchase a second home. In this article, we consider what you should expect to save as a down payment for a vacation home, with reference to the policies and practices of some of the largest banks in the United States and Canada.
Vacation Homes Vs Rental Properties
The tax implications are vastly different when youre renting out your old home, as opposed to keeping it as one of two personal residences. If you go with the latter, the interest on your second mortgage is tax-deductible. But, if youre renting out your first home and generating business income from it for 14 or more days per year, you wont be eligible to deduct all of the mortgage interest on that second home. You can, however, deduct expenses related to the upkeep of the property during the days tenants occupy it each year.
With that said, there are a number of elements that go into being a landlord. In addition to complying with local landlord laws, you could face other potential headaches. You also may have to respond to a water leak or frozen pipe in the middle of the night. Of course, there are inherent expenses related to these situations.
Some experts estimate you can expect to spend 1% of the purchase price in maintenance expenses per year. Furthermore, you can resort to the square-foot rule. This guideline suggests you save $1 for every square foot of the property to cover annual maintenance costs. So if you have a 2,300-square-foot home, you will need $2,300 annually or roughly $192 monthly.
Of course, you can hire a management company to cover this while you kick back and relax. The price you pay for this comfort could be steep, though. A financial advisor whos versed in home costs and mortgages can help you figure out if this venture is profitable or not.
How Much Is A Down Payment On A Vacation Home
While it varies by lender, according to Darnell, conventional mortgage programs that might typically need only 3% down on a primary residence will require a minimum of 10% down on a vacation home. If you plan to rent out the home rather than enjoy it yourself, that down payment could go up to 15%. In addition to having a higher down payment, mortgage interest rates on vacation homes could also be higher.
Also, not all mortgage products that are available for buying a primary residence are available for a vacation home purchase. For example, FHA and VA loans cant be used to buy a vacation home, says Sherry Graziano, senior vice president and mortgage transformation officer at SunTrust Bank.
Find Your Vacation Property Loan
By working with Northview Bank, you have access to Vacation Property Loans that work for you and your budget. To find the right cabin financing solution for your family, check our Vacation Property Loans site. One of our financing experts will be able to help you find the right solution for your budget and your life.
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Cottage Mortgage Explained: Two Types You Should Know
Summer is right around the corner! Time to soak up the warm weather and enjoy time spent with good friends and family.
If youre like many other Canadians the idea of buying a cottage has crossed your mind a time or two. According to Remax Canada, cottage sales are still on the rise.
Sometimes called second home or summer house, cottages often become a very special place passed on through generations while making life long memories along the way.
If you have been thinking about buying a cottage youll appreciate todays post.
Were going to walk through the two types of cottages, spend a little time discussing how you can mortgage your dream cottage, and provide you with some resources you can use to find your perfect vacation home.
2 Types of Cottages: Types A & B
There are essentially 2 types of cottages: lenders call them type A & B.
Type A Cottages: Type A is a cottage with year-round access, a winterized home with a permanent heat source and potable running water set on a permanent foundation below frost line.
Type A cottages can be mortgaged similar to mortgaging a permanent residence, minimum 5% down payment, fixed and variable terms with eligibility to refinance once equity has built up.
Interest rates might be 0.10-0.20% higher than a traditional mortgage mainly because its not owner occupied year round. If the down payment is less than 20% an insurers premium must be added, similar to a standard mortgage.
Getting a Mortgage For Your Cottage
% 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.
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What Are Todays Vacation Home Mortgage Rates
Mortgage rates continue to defy the odds at alltime lows, but who knows for how long? With low rates and a cooling sellers market, now could be the best time to buy that vacation home.
Get a rate quote for your second home. No social security number is required to get started, and all quotes come with instant access to your live mortgage credit scores.