Lots of pathways to a second home
Purchasing a leisure residence doesn’t have to be just for the rich and famous.
Some buyers pay cash, but many finance their new vacation spot with a , either on the new home or a home they already own.
Today’s mortgage marketplace offers a number of different loans and strategies to purchase that vacation, weekend or otherwise part-time home. The good news is, a second home is often within reach for the average homeowner.
In this article:
- Most lenders view second homes as a different category of home purchase, meaning that lending is more lenient for vacation homes than for investment or rental properties. However, they come with some additional requirements compared to primary residence purchases.
- There are three ways to finance a second home purchase. You can tap into your home’s value with a cash-out refinance, use a home equity line of credit (HELOC), or take out a conventional loan specifically for the second home.
- The requirements for a second home will be different than a primary residence, so understanding the pros and cons of each loan type will help you make the best decision for your situation.
What’s different about buying a second home?
Second home mortgages are widely available from lenders across the country.
Lenders who use Fannie Mae and Freddie Mac guidelines view second homes as a different category of home purchase. The three main categories are as follows.
- Primary residence
- Second home
- Investment property
Second homes fall within the mid-tier of home types when it comes to financing. Lending is more lenient for vacation homes than for investment or rental properties. But they come with some additional requirements compared to primary residence purchases.
One of the biggest differences is the down payment requirement.
Home buyers who purchase a primary residence often need no down payment if they use one of the many zero-down payment options such as the USDA home loan.
FHA mortgages and VA loans are also popular .
Yet, second homes are not eligible for these government-sponsored programs. Vacation home buyers will use a conventional loan approved to Fannie Mae or Freddie Mac standards.
Fannie Mae requires at least 10 percent down for second home purchases, compared to just three percent for a primary residence.
Some lenders could require a higher down payment than Fannie Mae’s standard second home minimum. Some could require 20 to 30 percent.
It’s important to shop mortgage lenders to find one who offers terms that will work for you.
Still, second home buyers tend to put more money down, on average. Many others pay cash.
According to NAR, the share of vacation buyers who paid in cash rose to 38 percent in 2015. Of the second home buyers who financed their purchase with a mortgage, nearly half made a 30 percent or more down payment.
But putting this much down is certainly not the requirement and more lenders are offering more lenient second home mortgage options.
Three ways to finance your second home purchase
If you’re thinking about buying a second home this year, there are a few different ways you can fund your new purchase.
You may not even have to take a loan out on the second home.
These are the most popular methods of making a down payment — or paying cash — for a second home.
Tap into your home’s increasing value
Home values are rising across the country.
Many homeowners have built substantial equity in their primary or rental residence in just the past few years. They can use tap into this equity via a cash-out refinance.
For example, a homeowner owes $100,000 on her mortgage, but her home is now valued at $200,000 due to appreciation. She could “extract” some of the equity by refinancing into a bigger loan and taking the difference in cash.
In this case, the borrower would have access to a substantial down payment on a second home:
- New loan amount: $160,000
- Current mortgage: $100,000
- Closing costs: $3,000
- Available cash: $57,000
Borrowers who have good credit could borrow up to 80 percent of their home’s current value with a conventional loan. Other loan types allow an even higher percentage.
FHA loans allow 85 percent cash-out refinancing, while veterans may have access to 100 percent of their equity if they use a VA cash-out loan.
Today’s low mortgage rates allow some borrowers to drop their rate while taking a cash-out refinance. They could even come out with a similar payment on a bigger loan amount thanks to a lower interest rate.
Cash-out refinancing can be a good way to liquidate your home equity and then use it to afford that vacation home you’ve had your eye on.
Before you take this step, be sure you can afford the larger monthly payment on your primary home. Also consider the financial obligations associated with second home ownership, like taxes, insurance, and ongoing maintenance.
But for many, taking out a bigger loan on real estate they already own is the most economical way to buy a second home.
Use a HELOC for your second home purchase
According to NAR’s annual vacation home buyer survey, a home equity line of credit (HELOC) on a primary residence is a favorite funding source for second home buyers.
If you have enough equity in your home right now, then you would simply take out a line of credit and buy your second abode outright or use the funds to pay for the down payment.
This option would eliminate the need to refinance your current mortgage. You would keep your first mortgage intact and add another loan with different terms.
This option works well who have refinanced into a very low rate. Opening a line of credit does not affect your first mortgage.
Homeowners can tap into 100 percent of their home’s value with a HELOC. Many local credit unions and national banks offer high loan-to-value home equity lending. Lenders are opening up new HELOC options daily.
Typically, applicants need good to excellent credit, but HELOCs come with some interesting perks. Once approved, cash generated from the loan is yours to use as you wish. Its interest rate is based on Prime rate, which is very low right now. So the rate may be lower than you would pay on a conventional mortgage.
Plus, you may be able to circumvent the closing costs that you’d have to pay by taking out a new primary mortgage.
You usually have the choice of a home equity line which has a variable rate, or a home equity loan that has a fixed rate. The fixed option comes with a slightly higher rate, but has better payment stability built in, making it the right choice for some second home buyers.
Conventional loan guidelines for second homes
A second home can be purchased just like any other home: with a mortgage taken out on the property being purchased.
However, the loan options are more limited. Government-backed programs like FHA loans VA loans, and the USDA mortgage only allow primary residence purchases.
But conventional lending through Fannie Mae and Freddie Mac is widely available. Just about any bank or credit union in the country offers this type of financing.
The conventional second home mortgage may have a fixed or adjustable interest rate, and require a down payment of at least 10 percent.
Keep in mind that the lender will make check whether the home “looks” like a vacation home. In other words, the buyer does not plan to turn the home into a rental property.
Second home mortgages come with lower rates than mortgages for rentals.
The lender will make sure the vacation home is a reasonable distance away from the buyer’s primary residence.
The property location is also an indicator. A vacation home that is near a popular travel destination is more likely to be a second home in some cases. However, even in this case, the lender will examine potential timeshare or short-term rental plans for the home, an arrangement that is not allowed by Fannie Mae.
What are today’s mortgage rates?
Second homes prices are still affordable, and mortgage interest rates remain low. Now is an affordable time to buy a vacations home or condo.
Check today’s rates and get a no-obligation quote for the financing type that you choose.