Second/Vacation Home Loans
If you found a dream home in your favorite summer vacation spot or a have a job which requires you to spend considerable time in another city, you might be interested in financing a vacation home or second home. Depending on how much time you spend away from your primary residence and what you spend on hotels or other rentals, the total expense of closing costs and second home interest rates could save you money in the long run. In addition, a second home allows you to invest your money rather than throw it away paying rent.
What Is a Vacation Home Mortgage or Second Home Mortgage?
A second home mortgage refers to the loan taken out when financing a vacation home or financing a second home. If you are looking to purchase a second home – not your primary place of residence – and do not plan to make income from the home, as you would on a rental property, then you will take out a vacation home loan.
The Difference Between Investment and Vacation Home Loans
Yes, some second-home mortgages allow you to rent out your property (If you rent it for 15 days or more during a year, you will be subject to taxes and reporting). Simply renting your property, however, does not automatically make your second home mortgage an investment property loan. The difference between the two is how your lender verifies your ability to repay the loan. If you need the money from renting the home to afford the loan payment, then it is technically not a vacation home mortgage; it is an investment property loan.
Although similar, investment property loans are structured differently and have different requirements than vacation home loans. A loan on an investment property is considered a commercial, rather than consumer, purpose loan. This will affect your second home mortgage rates, typically increasing the rate. Lenders also require a special type of appraisal on a rental property which assesses the home for rental income. A commercial appraisal is more expensive and will increase your upfront costs at closing. Insurance requirements for an investment property might also be more cumbersome than requirements for a true second home.
Second Home Mortgage: How It Works and What’s Required
Second home mortgages are structured similarly to primary mortgages. Like primary mortgages, lenders typically set second home loans up with 15 and 30-year repayment terms with a fixed interest rate. Unlike a primary residence, however, you will need to pay more up front. Some primary mortgages require as little as three percent down on the purchase price.
With a second or vacation home, you can expect down payment requirements to fall between ten and twenty percent, depending on the overall soundness of the loan and potential loan risk from the lender’s perspective.
Second Home Loan Requirements
The application process and necessary documents for a second home loan are similar to those required when applying for a primary residence. Borrowers need to complete a home loan application and provide documents verifying income and assets. Lenders also assess the borrower’s ability to repay the mortgage by calculating a debt to income ratio (total monthly/annual payments divided by total income earned monthly/annually). In addition to proving ability to repay, lenders also consider down payment, the appraised value of the property and the borrower’s creditworthiness.
Considering the Total Cost
When considering an application for a second home loan and evaluating the borrower’s ability to repay, a lender only considers loan payment, the borrower’s existing debts, and the borrower’s verifiable income. This repayment evaluation only includes principal, interest, taxes, and insurance (escrow) and any homeowners’ association fees required for the property.
Lenders do not take into account all of the factors which contribute to the total cost of owning a second home, such as a second set of utility bills, maintenance and repair costs, furnishings, household items and travel expenses. Remember, you might also need to hire a property manager to keep an eye on your home during the off-season or when you are not there. The last thing you want a vacation home to be is a financial burden; borrowers should consider all of these factors carefully when deciding if they can truly afford to own a second home.
How to Qualify for the Best Second Home Mortgage Rates
In general, second home mortgage rates are usually higher than those on primary residence loans. Although you will find some variation from lender to lender and between markets on vacation home mortgage rates, most financial institutions price these loans based on similar variables. Vacation home mortgage rates usually start with a nationwide base rate, such as the Wall Street Journal Prime Rate, for example.
Lenders will charge the base rate, plus a certain percentage point. To determine the additional interest on top of the base rate, your lender will consider several factors unique to your loan including:
- Your Credit Score and History
- Down Payment
- Loan Type
- Loan Term
- Repayment Schedule
Additional Lending Risks Associated with the Property
To access the lowest vacation home mortgage rates, you should aim to get your credit score as high as possible, plan to put as much down on your home as you can and choose the shortest repayment term you can afford. In addition, it is a good idea not to open up any new credit cards or take out any other loans prior to closing your vacation home loan; new credit accounts could lower your credit score, raising your vacation home mortgage rates.
Applying for a Second Home Mortgage Online
If you are ready to put your feet up in a dream vacation home, then don’t waste another vacation day in a rental property. Fill out a loan application, instead. With less paperwork, the ability to monitor your application’s status and lending experts available to answer your questions and guide you through the process, getting a second home loan online is easy.
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