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Obtaining a Mortgage for a Vacation Home


By Sadiya Anjum

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Obtaining finances to buy a vacation home or a second home can be quite tough when compared to obtaining a mortgage for your first home. Lenders see a lot more risk in financing vacation homes as they believe that borrowers are more likely to default on this mortgage than the one on their primary residence.

Since vacation home mortgages are considered as high risk, you can easily expect stringent rates and terms. Beginning with the down payment, a borrower is required to put down at least 10% in contrast to 3%-5% on primary homes. The interest rates are also comparatively higher. Crisis protection usually requires 2-3 months mortgage payments in reserve for primary mortgages. When taking out a mortgage on your vacation home, it easily demands 6 months in reserve for both mortgage payments.

Moreover if you plan to rent out your vacation home the terms just get harder. Considered as loans for investment property, interest rates are higher. Although it is comparatively tougher people are still purchasing vacation homes with mortgages. What one must do is shop around for lenders. Finding a lender who has a branch in the vacation area may be quite helpful. Besides, each lender offers different terms and rates. Some lenders may accept a lower down payment if the borrower agrees to a higher interest rate.

If one has enough equity on their primary residence, then they may consider other options to finance their vacation home. This basically includes a second mortgage in the form of a home equity loan or a home equity line of credit (HELOC). A home equity loan provides a lump sum against the equity on a property. A home equity line of credit is basically a revolving line of credit against which a person can borrow as much as he may want. It is quite similar to a credit card in its basic functions. Second mortgages, however, have higher interest rates and the equity of their home is spent. One may even jeopardize their primary residence if they default as it serves as collateral in second mortgages.

It may be prudent to apply for a vacation home mortgage instead of a second mortgage on their primary residence. Perhaps to just obtain the down payment, one may consider utilizing their equity to take out a second mortgage. Another option may be to get cash-out mortgage refinance. Refinancing your primary mortgage at a higher amount can provide you with the money for down payment. Refinancing may be a better option as it is just one loan on your primary residence and can be on a long term basis.

Study your financial situation carefully before shopping for loans. Make sure you approach several lenders and choose the best offer available. If the rates are too high or another mortgage does not fit your monthly budget, then may be it is time to wait for a while before buying a vacation home.

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