Turning your dream of owning a summer home into a reality is possible with smart saving and the right financing. Financing a vacation home can be complex and credit standards may be high. However, if you plan carefully and understand how much you can afford— you may find yourself the proud owner of a beach home or mountain cottage.
Leverage Your Existing Equity
Your home equity equals the current value of your home minus the mortgage balance outstanding. For example, if your mortgage balance is $100,000 but your home is worth $200,000, refinancing your mortgage for $150,000 can give you $50,000 for the purchase of a summer home. Refinancing your first mortgage allows you to maintain one home loan payment per month, although the amount will increase. However, not everyone is willing to put their primary home at risk to buy a summer home. Interest rates are another factor to consider when thinking about a cash-out refinance. Depending on the interest rate of your original loan, you may not want to refinance and pay a higher rate.
Obtain a Separate Home Loan
A mortgage secured by your vacation home is another option. Many lenders require a larger down payment for a second home purchase, which is considered a non-owner occupied property. Similar to a first home purchase, you’ll need to go through the entire mortgage approval process. Keep in mind that you will be held to the same total debt to income ratios, even if you have two home loans. Closing costs are another factor to consider with the second mortgage option.
Home Equity Loan or Line of Credit
A home equity loan or line of credit can assist you with the entire purchase of a vacation home. Home equity loans and lines provides access to cash to put toward a vacation home purchase. These financing methods generally have lower closing costs. Interest rates on home equity lines are usually variable, so you may be open to risk from future rate increases.
Using your vacation home as a rental property may impact your financing options. Although rental properties are approved with a different set of standards than traditional home purchases, the income from a rental property can help you meet a lender’s financing requirements. The ability to write off expenses of a rental home may also affect your tax position. Prior to financing your summer home as a rental property, research current rental rates in the area. Calculate cash flow minus expenses to determine how much net rental income you can put toward your loan each month.
If you’re ready to take the next step towards purchasing a vacation home this summer, don’t hesitate to contact a BrightPath Mortgage specialist. They will review your financing options and your current financial situation. They’ll guide you to the best home loan product for you.