By: Yara Zakharia, Esq.Thinking of investing in a second home to get away on weekends or simply for retirement purposes? Well, you're not alone. Whether it's a timeshare, a chalet up in the mountains, a cottage in the countryside, a waterfront home, or a trailer, an increasing number of mainstream Americans are now taking out vacation home mortgages, which were once a home loan only affordable and accessible to the wealthy.
A recent study conducted by the National Association of Realtors put the number of vacation homes in the United States at around seven million - a substantial increase from previous decades according to the association. It is estimated that more than 30 million Americans will purchase a vacation home within the next decade.
With a growing interest and demand in popular vacation spots, prospective buyers should familiarize themselves with vacation home mortgage loans as well as vacation home mortgage rates and payment options. What follows is a discussion of the critical elements of a vacation home mortgage:
1. Vacation Home Mortgage Loans:
It used to be an uphill battle to obtain a vacation home mortgage loan because lenders assumed that there was a higher potential for default by buyers on this additional mortgage. Consequently, the risk was passed on to the buyer by way of higher interest rates and down-payment requirements. Today, although obtaining a vacation home mortgage is still much more difficult than getting a home loan or mortgage refinance for a primary residence, it is not so much a challenge.
In light of the fact that property values are riding high across the U.S. and mortgage interest rates are near 40-year lows, applying for a vacation home mortgage loan is a sound strategy.
Although buyers will sometimes have to make a 10 to 20 percent mortgage down payment for a vacation home loan, Doug Perry, a senior vice president at Countrywide Home Loans, one of the nation’s biggest lenders, stated that there are lenders who will only require a 5 percent down payment, which he noted is "a change from 5, 10 years ago.”
These days, a buyer can obtain a very attractive vacation home mortgage loan from stock brokerage firms. For instance, customers of Merrill Lynch can acquire loans with no down payment. If the buyer has an adequate stock portfolio, the entire purchase price of the property can be financed by a Merrill Lynch vacation home mortgage.
Other options available to buyers interested in vacation home mortgages are 1) interest-only loans and 2) "pay option" adjustable-rate mortgages (ARMs). With the former, a buyer makes smaller, interest-only payments for a fixed period of years and then pays both the principal and interest in larger payments. With the latter, a buyer chooses among a number of payment methods each month.
If property values continue to rise, second-home buyers should consider loans like interest-only and pay-option ARMs. However, if housing prices fall, or if a buyer always makes the lowest payments allowed, that buyer might end up owing more on a house than what he paid for it under many pay-option ARM formats. Interest-only borrowers, such as purchasers of primary residences, sometimes encounter difficulties when they have to start paying the higher combined mortgage payments for interest and principal.
Buyers who rent out the property might face a higher down payment since that will further raise the risk for the lender.
For better deals on a vacation home mortgage, buyers should keep an eye on states such as Colorado, Arizona, California, and Hawaii, where second-home purchases are common. Lenders in those states are acquainted with the specifics of vacation home mortgages and face competition from other mortgage brokers and banks for their market share.
2. Vacation Home Mortgage Rates:
Since the risk is passed on to borrowers, vacation home mortgage rates are nearly 1/4 to 1/2 of a point higher than rates on primary-residence mortgages. Nevertheless, a vacation home could provide tax advantages:
The homeowner can deduct the interest he pays on two houses and the interest on any debts secured by one or both of those properties. More specifically, if the total mortgage balances of the principal and second home do not exceed $1 million, plus up to $100,000 of home equity indebtedness, a borrower can fully deduct the mortgage interest. The IRS’s definition of a house is considerably liberal.
Before obtaining a vacation home mortgage, prospective homeowners should carefully study their mortgage options the vacation home mortgage rates and the vacation home mortgage loan and determine how much they can afford. This will ensure that they get the keys to the home of their dreams.
