When I take a family vacation, I typically rent a home versus a hotel for the home-like atmosphere and amenities. This has me wondering why I don’t invest in my own vacation property. With mortgage rates still near historic lows, now may be the time to buy property in your favorite vacation destination.
Since government loan programs (FHA, VA, USDA) are not available for second home financing, let’s look at other options for financing vacation property.
Cash-out refinance involves refinancing your primary residence mortgage and receiving cash for the remaining equity. You need sufficient equity in your home for this to be an option. For example, if you owe $100,000 on your home worth $500,000, you may be able to cash out up to 80% loan-to-value (LTV), which would be $400,000 minus the $100,000 you owe. This leaves you with $300,000 in cash to purchase your vacation property. You can choose term options from 10-30 years fixed or adjustable, plus you’ll have one monthly payment, not two.
Home Equity Line of Credit (HELOC)
HELOC involves attaching your loan to your primary residence. Typically, this loan will not pay off your current mortgage, but be a second lien adding to your monthly expense on top of your current mortgage. Depending on the lender, this loan may go to a LTV higher than 80%, which helps if you need more funds than what 80% will allow. The drawback is this type of loan is typically adjustable and at a higher rate than today’s conforming loans.
Conventional Financing obtains a loan on your vacation property, not your current primary as discussed in the prior two options. The loan process is similar to purchasing a primary residence with small differences in minimum down payment and reserve requirement. Second homes require at least 10% down. The lender will need to verify you have sufficient funds for closing and between 2-6 months’ worth of reserves to cover both your primary and second home loan payments.
Defining a Second Home
There are specific requirements for defining a second home, e.g., needs to meet minimum distance requirements from your primary residence, or located in a recreational area, such as a lake or ski resort. Fannie Mae’s second home requirements are:
- Occupied by the borrower for some portion of the year
- Restricted to one-unit dwellings
- Suitable for year-round occupancy
- Borrower must have exclusive control over the property
- Must not be rental property or timeshare arrangement
- Cannot be subject to any agreements that give a management firm control over the occupancy of the property
Purchasing a second home in the same city where your child is going to college does not qualify as a second home; it is defined as an investment property, which has stricter guidelines and higher down payment requirements.
Scouting a Second Home
One way to start scouting for a second home is to find a real estate agent who is familiar with your desired location. They can fill you in on weather and traffic patterns, help you evaluate the location and amenities of a property and provide information about comparable sales, resale prospects and long-term property value.
Before you start your search, talk with a lender so you know upfront what you can afford and your specific financing options.
We are to here to help, even if you are not an RCB Bank customer. Connect with a local RCB Bank lender to get answers to your lending questions.