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A Mortgage for a Vacation Home? Must-Knows Before You Dream

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October 21, 2015
A Mortgage for a Vacation Home? Must-Knows Before You Dream

Ski season is just around the corner. Are you dreaming of your very own mountain condo with easy access to the slopes? Or, maybe your tastes run warmer: a beach condo or a lakeside cottage?

Americans are buying vacation homes at the fastest pace since the Great Recession pinched everything from spending to saving. An improving labor market and steady gains in the stock market in recent years have opened the floodgate of second-home buyers, say industry analysts. The National Association of Realtor's 2015 Investment and Vacation Home Buyers Survey, which covers existing- and new-home transactions in 2014, shows vacation-home sales jumped to an estimated 1.13 million last year, the highest amount since NAR began the survey in 2003.

Vacation property sales were up 57.4% from 717,000 in 2013, the NAR said. It turns out that you don't necessarily need to pull down a six-figure salary to purchase a vacation home either. The NAR survey found that median household income for vacation home buyers in 2014 was $94,380 and 70% of vacation homes purchased last year were financed with a mortgage.

Who’s buying? It's not just people in their 50s and 60s. "We've seen a lot of people buying vacation houses at the shore in their 30s and 40s. They are buying second homes that cost $300,000 to $1 million and up," says Christopher Copley, regional sales manager at TD Bank.

Loan Options

When it comes to financing your vacation getaway here's a few options to consider. In recent years, Copley estimates that roughly 75% of those buying a vacation home purchase an existing residence. The remaining 25% will purchase land or an existing property as a teardown and then rebuild using a construction loan.

A mortgage on a vacation home is a standard conventional loan, just like your first mortgage. However, most borrowers can expect a slightly higher interest rate in the neighborhood of 1/8% more than if it were your primary home.

"There is a rate bump for a second home. Generally, if someone is going to default it would be on the second home," Copley explains. Jumbo rates apply if the loan value exceeds $417,000.

Given that this new expense will be your second mortgage, Copley suggests 20% down payment is a reasonable amount to consider.

For those looking to go the tear-down-and-build-new route, construction loans are a slightly different animal. For instance, TD Bank only offers a 30-year fixed rate for construction loans. Generally, the construction loan mortgage will carry a 1/4% rate higher than a traditional mortgage, with a 20% down payment required, Copley says.

You’ll also need to come into most banks with some homework already done. Take the time to work with a builder and develop the proposal. You’ll need to show building plans and specs to your banker as part of the loan application process.

Run the Numbers

Before you dive into a vacation home purchase, it’s worth working out some math, including adding up all related costs, such as insurance, maintenance, condo or association fees, and property taxes for your second residence. Is the property rentable? Factor that into your overall annual costs for the vacation digs.

"Do the math and make sure it is a viable option for the longer-term," suggests Copley.

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