Mortgage Rates for Vacation Homes

Published on: May 2nd, 2022 | Written by Jimmy Vercellino

Imagine for a moment that your family can take off for a vacation without dealing with the hassle of finding and booking a rental. Rather than go through doezens of websites for a convenient location and rate, you can stay in your own home.

Owning a vacation home means this dream can come true, which gives you and your kids more opportunities to go on adventures. Life is too short to spend climbing the corporate ladder and miss out on making memories with your family.

Although vacation home financing is challenging to obtain, we believe it’s possible to get an affordable rate.

We will walk you through the different types of secondary properties and how they differ. That way, you and your partner understand the available financing options and potentially move forward with your dream vacation home.

What’s the Difference Between a Vacation Home and Investment Property?

While considering a second home purchase, you must know the difference between a vacation home and an investment property.

For example, you can face fraud charges by classifying a rental or investment home as a secondary residence. It is wise to see the differences and choose the financing option that meets your needs.

Investment Property

Having short-term or long-term rentals means a lender will ask you to classify the home as an investment property.

They always require higher down payments for these secondary homes and may need cash reserves for several payments ahead.

The loophole is if your family lives in the home for at least 14 days, or 10% of the days you can rent it out for. Then, the mortgage company will call it a secondary residence, or vacation home.

You should work with an experienced real estate agent and home lender to ensure that you obtain the correct financing for your next residence.

Vacation Home

According to Freddie Mac, they classify a vacation home as a secondary residence located more than 50 miles away from your primary residence.

It is against the law for a rental firm to manage your property and still classify it as a vacation home. They do not allow you to use rental income from the property to help qualify for financing.

Again, your lender will tell you to call the property an investment home if the goal is to rent it out.

What’s the Difference Between a Primary Residence and Secondary Residence Mortgage?

When your family decides to purchase what the law calls a vacation home, now’s the time to apply for the proper financing.

Keep in mind that your options for financing a second home are diminished compared to a primary residence. You can expect several things to change as you pursue a vacation home loan.

Higher mortgage rates

Secondary homes almost always have higher interest rates than your family’s primary home. That’s because lenders view the loans as higher-risk, since someone is more likely to default on the home they don’t use everyday.

On average, you’ll experience interest rates that are .5% higher.

Here’s how that translates to a $600,000 home loan. For your primary residence with a 5% annual interest rate, you would pay $30,000 in interest annually. That number jumps to $33,000 with a secondary or vacation home loan.

Stricter down payment requirements.

While lenders can provide a 0% down payment for the VA Loan and 3.5 down payment for the FHA, they’ll require more for a vacation home.

You can expect to pay 10% down for a vacation home and 15% for an investment property. A lower credit score and income level will increase that amount.

For investment properties and some vacation homes, lenders require borrowers to have between 2 and 6 months of cash payments.

More Stringent Debt-to-Income Requirements

Another expectation for secondary home loans is having a stricter debt-to-income ratio requirement.

Most lenders accept 43% on the family’s primary residence loan (your monthly payments divided by gross income). However, that number increases to 50% when purchasing a vacation home.

Higher Credit Score Requirements

Most conventional primary home loans come with a minimum credit score requirement of 500. Mortgages through the VA Loan or the FHA can be even lower depending on the mortgage company.

We tell our clients to have at least a 640 if they have interest in buying a vacation property.

What Are Alternate Financing Options for Vacation Home Loans?

Not having the available cash to cover a down payment on your vacation home does not automatically disqualify you from obtaining a loan.

There are other options to pursue that will allow you a favorable mortgage on your vacation home.

Both of the options below will drop that down payment, which results in a lower mortgage interest rate.

Home-Equity Line of Credit

A home equity line of credit (HELOC) is a common tool for financing vacation homes or large renovations and improvements in your primary residence.

This revolving line of credit allows you to borrow money against the equity that you have already built in your primary home.

For example, you and your partner could pull $50,00 out of the current property and roll that into a vacation mortgage loan.

Cash Out Refinance

One option for financing a vacation home is completing a cash out refinance. This replaces your existing mortgage with a larger one, taking the difference between them as cash.

Steps to Take Before Purchasing a Vacation Home

1). Determine what you can afford

When deciding to purchase and finance a vacation home, the first step is to determine what your family can afford.

Although it is exciting to dream about owning a 5-bedroom beach home, you don’t want to ruin the idea with debt you can’t afford to pay back.

That could have negative and lasting impacts on your credit score and future borrowing limits.

2). Decide how you plan to use it

The next step is deciding whether to classify the home as a secondary residence or an investment property. Again, you could become involved in a lawsuit without adhering to Freddie Mac’s guidelines for home loans.

3). Determine best financing options

Once you know your price range and intended use, begin evaluating different vacation home financing options. Decide if you can obtain a home-equity line of credit or a cash out refinance or if you have other options at your disposal.

4). Seek out an experienced lender

We cannot stress enough working with an experienced lender. You can apply with multiple to find the lowest rate on the family’s future vacation home.

Just as important as the monthly mortgage is a company that takes care of you during the process. They are proactive in teaching you about home loans and contacting your family at each stage.

This will help you adhere to all legal requirements while obtaining a loan with the lowest mortgage payments.

Begin Your Vacation Home Financing Today

Interested in obtaining your dream vacation home? Owning your vacation residence outright means you can forget the hassle of finding and booking overpriced rentals.

You get to feel the comfort of your own home every time you vacation as a family! As experienced home lenders, we serve you nationwide and will help finance the dream secondary residence.

Our team can help you get started with a loan application or answer any questions you may have. Give us a call at (480)-900-8387 so we can show you how buying a home can be an exciting adventure!

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