Buying a Starter Home

3 Things To Know About Financing A Vacation Home

26 April 2017

Capucine Leroux

Do you love your vacation time, but find yourself getting tired of impersonal hotel rooms? Would you like to be able to give your kids their own rooms on a family vacation without having to book and pay for extra hotel rooms? Is there a particular vacation spot that you return to year after year? It may be time to consider purchasing your own vacation home. Buying a vacation home can be a very different experience from buying a primary home, so take a look at a few things you need to know about the process of buying a vacation home for your family.

Vacation Homes and Rental Homes are Different

Some people buy a second home for themselves only. Others hope to defray some of the costs of buying the home by renting it out when they're not using it. When it comes to purchasing the home, these are very different positions, and they can affect your interest rate.

Buying the home as a vacation home streamlines the qualifying process and can net you a more favorable interest rate. Purchasing it as a rental home is more complicated. If you need to rent the property to help cover the costs of ownership, your lender will consider it an investment property, not a second home. You'll need to get an appraisal with a rental schedule to demonstrate the potential income of the property. Your lender will take this into account when deciding whether you qualify for a loan and how much your interest rate will be.

Expect to Pay More Down

There are a variety of ways for you to buy a primary home with very little money down, especially if you have good credit. However, you can't expect to find the same kind of deals when you're buying a vacation home.

When you buy a second home, you're taking on a large amount of additional debt, and that makes you a bigger lending risk. Lenders know that when people run into trouble financially, they're more likely to prioritize the payments on their primary home's mortgage than on their vacation home's mortgage. If the home is going to be a rental property, the risk is even higher, because in a financial downturn, you may not be able to keep the property occupied, and if you don't have tenants, you may not be able to make your mortgage payment. Because of these risks, lenders usually require a higher down payment on vacation homes than they do on primary homes.

Don't Forget The Additional Costs

Rental homes often come with costs that primary homes don't have. You'll still have to pay the ordinary costs of home ownership, like property taxes, homeowners insurance, and maintenance costs, but you may also have to pay for other things, like a property management service to care for your home when it's empty or take care of tenant needs when it's rented. Rental properties come with their own expenses – it can be expensive to clean and repair or replace things between tenants. If you buy a second home near a beach, you may need additional flood insurance. If your vacation home is a condo or gated community, you may have homeowner's association dues or other community fees to pay.

These additional costs won't necessarily affect your ability to qualify for a mortgage, but you should definitely take them into account when deciding how much you can afford to pay for a second home. Don't assume that the costs of owning a second home will be the same as the costs of owning a primary home – chances are, they'll be higher.

A vacation home can be a terrific purchase for your family, but it's important to go into it knowing what to expect. Shop around for the best mortgage deal and talk to a local real estate agent about finding a vacation home that's affordable and meets your family's needs. For more information, contact a business such as OCALA LUXURY.

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