Can You Afford A Vacation Home?


vacationhomeAre you daydreaming about a place where you can vacation on your family’s terms and create memories that your children will always remember?

This could be the perfect time to turn that dream into reality.

Resort areas were hit hard by the housing crash seven years ago, and many have yet to recover, so bargains are still available. Interest rates are at historic lows, and you could save thousands over the life of a mortgage if you act now. Plus, if you can rent your property during the weeks you don’t plan to use it, you may be able to recoup some of your costs with the rental income.

Before you dive into real estate investing and start researching vacation properties, you’ll want to decide if you can really afford to purchase a vacation home.

Consider the mortgage before buying a second home

Defaults have been high in resort areas, and many lenders are leery of financing second homes. Therefore, the down payment and interest rate you are quoted are likely to be higher for a vacation property than for your principal residence.

Lenders typically look closely at four factors: your income, your total debt load (which will include the mortgage on your primary home, if you still have a mortgage, your credit rating, and the amount you want to borrow. You will need a good credit score (the average credit score for closed loans in 2014 was 726) or you could be faced with a higher interest rate.

Depending upon the location, condition, and market value of the property, as well as your own financial status and credit history, a typical 15- to 30-year mortgage for a non-owner-occupied property usually requires a down payment of 20 percent, though it could be higher. (Of course, the higher the down payment you can make, the easier it will be to find a willing lender.)

You can take equity out of your primary home to finance the purchase of a vacation home by refinancing or taking out a home equity line of credit (HELOC), but you may need that equity to weather future rough housing markets or to use for other purposes. You also may end up paying more interest because the mortgage on a vacation home.

Ideally, before you buy a vacation home, you should be very familiar with the area in which you want to buy and also have a good understanding of the local real estate market. Purchase prices in resort areas vary greatly, but often a house in a popular resort area is more expensive than it would be in a normal setting. Resort areas also have their own seasons for home sales, so take your time and find the perfect fit.