The NAR’s 2016 Investment and Vacation Home Buyers survey found that vacation-home purchases declined by 18.5 percent from the peak level recorded in 2014, when 1.13 million vacation homes were sold. Though the vacation home market cooled off a little bit last year, 2015 was still one of the best years for this market segment, with the second highest number of vacation homes sold in nearly a decade. What about this year? Real estate analysts argue that there are several reasons why 2016 is a great year to buy a vacation home.
Purchasing a vacation home makes a lot of financial sense under certain circumstances. However, it’s not a decision a home buyer should take lightly, considering that buying a second home means taking on more debt. Now, let’s break down the five most important factors a person should consider before getting a mortgage on a vacation home.
- The ability to get a second home loan. According to the National Association of Realtors, one-fifth of home buyers tap into the equity of their primary residences to make the down payment required to buy a vacation home. For many people, therefore, having enough equity built in their first homes represents one of the conditions for getting a mortgage on a vacation home. A sizable amount of equity will allow the homeowner to make a large down payment on the vacation property he wants to purchase, which will result in a smaller mortgage amount for him to repay.
- The financing options available. Knowing exactly what financing alternatives are available for vacation homes can help a home buyer make a better financial decision. Nowadays, there are three loan products that can be used to purchase a vacation home.
- FHA-insured home loans, which require a down payment of just 3.5 percent and a minimum credit score of 620; however, these loans are available only to the first time home buyers who will use their vacation homes as primary residences.
- Home equity loans, which are considered one of the best financing alternatives for purchasing a vacation home; on the downside, lenders are currently approving lower loan amounts than the equity homeowners have in their homes as a result of declining home values.
- Conventional mortgages, which typically require down payments between 20 and 35 percent; a conventional mortgage on a vacation home usually has tighter qualification requirements than a primary residence mortgage.
- Lenders require higher credit scores and lower debt-to-income ratios. When trying to get a mortgage on a vacation home, many home buyers don’t meet the minimum credit score and debt-to-income ratio requirements. To qualify for a second mortgage, a home buyer will need a credit score in at least the mid-600s. Additionally, the best terms and conditions are typically offered to customers with FICO scores above 720 and debt-to-income ratios below 36 percent of the monthly income. Unlike an investment property, a vacation home has no rental income to offset the mortgage payment. While no one can stop you from classifying your vacation home as an investment property and renting it several months a year, in this case the interest rate will be much higher and the qualification criteria stricter.
- A mortgage on a vacation home could come with a higher interest rate. Although all mortgage applicants go through the same rigorous application process, lending institutions are more cautious when lending money for vacation homes. When assessing potential risks, lenders generally assume that a borrower will try to keep up with the payments on his primary residence rather than on his vacation home if he ever runs into financial trouble. As interest rates are dependent on the risk profile of applicants, mortgages on vacation homes often carry higher interest rates than the loans on primary residences.
- Borrowers can choose between two amortization schedules. Most mortgages on vacation homes come with amortization schedules, or payment schedules, that allow home buyers to make payments over the course of 15 or 30 years. A 30-year payment schedule will translate into a lower monthly mortgage payment. Conversely, a 15-year schedule will require the homeowner to make a larger payment each month, but he will get rid of debt much sooner.
To learn more about the ins and outs of getting a mortgage on a vacation home, please get in touch with our mortgage originators today by calling (904)-389-4635 or using our online form. One of our experienced professionals will be glad to help you assess the financing and refinancing options available to you along with all the costs involved in getting a second home loan.