If you’re tired of spending your holidays in hotels and vacation rentals, consider joining the nearly one million buyers who purchased second homes last year. With today’s increasing real estate values, second homes potentially yield a return while providing a vacation spot to build lasting memories. Buying a second home is a little different than purchasing a primary residence. These are the most popular methods of making a down payment, or paying cash, for a second home:
1. Use a cash-out refinance on your primary home
Many homeowners have built substantial equity in their primary or rental residence. They can tap into this equity via a cash-out-refinance. Before you take this step be sure you can afford the larger monthly payment on your primary home. Also consider the financial obligations associated with second home ownership, like taxes, insurance, and ongoing maintenance. But for many, taking out a bigger loan on real estate they already own is the most economical way to buy a second home.
2. Open a HELOC on your current home
According to the National Association of Realtors annual vacation-home buyer survey, a home equity line of credit (HELOC) on a primary residence is a favorite funding source for second-home buyers. If you have enough equity in your home right now, then you would simply take out a line of credit and buy your second abode outright, or use the funds to pay for the down payment.
This option eliminates the need to refinance your current mortgage. You would keep your first mortgage intact and add another loan with different terms. You might want a HELOC if you have recently refinanced into a very low rate, because opening a line of credit does not affect your first mortgage.
3. Get a loan on the second home itself
Another option is to get conventional financing, underwritten by standards set out by Fannie Mae and Freddie Mac. It generally takes at least ten percent down to buy a vacation home. Depending on your credit score, and debt-to-income ratio, the lender may require 20 percent down or more, especially if you need to rent the property out part of the time to generate income.
Credit score requirements are slightly higher for second homes than for primary ones, and vacation property loans have slightly higher rates than do primary residence mortgages. Also note, you can’t obtain an FHA or VA loan for your vacation property, but if your seller has a government-backed loan against the property, you may be able to assume it.
When you finance a vacation property, you’ll need at least two months of reserves if you’re a well-qualified buyer, and at least six months if you’re self-employed or have any weaknesses in your file. One month of reserves is equal to the amount of money it would take to make one months' payment on both your primary residence and future second home.
Do you want to start building memories at your own vacation home? At Penny Lane our mortgage professionals can help you determine your path to second home ownership. We have many loan programs, are good at seeking solutions, and will do our best to help make your dreams come true.