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Vacation Home Or Rental Finance - Choose The Right Loan

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Real Estate Investment BasicsDid You Want A Vacation Home Or An Investment?

If you are in the fortunate position of considering the purchase of property while retaining your home you are doing well. Do you want a vacation home you can enjoy exclusively? Or do you want an investment you can drop in on occasionally? The goal of your expanded real estate holdings will determine which form of vacation home financing is right for you.

Either you want a vacation home, an investment property, or a bit of both. The difference is in how you finance the purchase. With the cash, you will be doubly blessed; the home will be free of lender-imposed restrictions, so you can do whatever you want. A cash buyer has the power to negotiate the best deal from sellers.

However, if you need to leverage your cash equity with a mortgage, you have three options. You will choose from either a second home loan, non-owner occupied loan, or, with a twist, a conventional residential mortgage.

Vacation Home Finance With Second Home Loans

When you purchase a second home, you can finance at the same interest rate as your primary residence. You will have to provide the equity for at least twenty-percent down payment for a loan; there is no option for private mortgage insurance.

You will have to state your full monthly housing cost plus the cost of the second home to qualify for a second home loan. Only you, your friends, and family can occupy this home. Second home loans are restrictive; the note attached to such a loan will have a rider addendum that dictates that you must not rent out the home.

Buying With Finance Like An Investor

Loans for non-owner occupied properties or rental property loans will carry an interest rate that might be more than 0.375 percent higher. Lenders will have varying policies about using rental income in qualifying for the loan.

The advantage of non-owner occupied loans is that you can both rent out the property and use it yourself. Such flexibility means that you can create a rental lease agreement and use the income to cover your costs.

Backing In With A Residential Mortgage

There is a third option. You can finance a second home with a conventional home loan and live in it for one year. If you have been in your first home for more than a year, rent out that home and move into the new one. After one year, you could join an online marketplace like Airbnb to earn income from short-term vacation rentals and use it yourself between bookings.

Funding your vacation home with a second home loan may seem like a way to save some cash by just not telling your lender, but it puts the property at risk along with your credit reputation. Banks are likely to call in your second home loan immediately if they find out that you have tenants. A demand for payment-in-full could come at an awkward time and result in foreclosure if you cannot quickly find the cash to pay it off.

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