Second Home Loan

Investments or Vacation Home Loans
According to a report being released in April 2006 by the National Association of Realtors, four out of every 10 sales of existing homes last year was bought as an investment or vacation home. Most of the buyers were baby boomers in their top earning years, looking toward retirement and hoping to build wealth or find a more desirable place to live.

Tougher to Secure a Second Home Loan
Lenders are tougher on second-home loan applications than on primary-home loans because the finances of a second-home buyer are, by definition, stretched thinner. Therefore, second-home rates traditionally run one-quarter to one-half point higher than those for first residences. Same goes for origination points on vacation-home loans.

Using a Home-Equity Loan
You don't have to have a pile of cash at hand to buy a vacation house. Many lenders will encourage you to take out a home-equity line of credit on your primary residence to fund all or part of your second-home purchase. Make sure you explain to your lender what you're doing, and you might want to consult with a tax adviser, too.

You need to see how much equity you do have in your existing home and what the benefits are of pulling out equity in your existing home vs. borrowing. It's always about the cheapest cost of borrowing. You would want to limit the amount you borrow in this way, since the limit on tax deductions for home-equity interest is $100,000.

Landlording and Mortgages
If you are planning to rent your second home, lenders will consider the property investment property rather than a vacation home. Some lenders won't even write those kinds of loans; they have a hard time selling mortgages on investment property in the secondary market.

If your lender will, expect to be scrutinizez more carefully than if you were not a landlord. In this case, you may need to factor in an additional 1 and half points as well as a minimum of 20% down payment. If you are planning to rent the property when you are not using it, it is important to get comparative rental income. The mortgage lender uses this to determine how much they are willing to lend you, often up to 80% of the rental income stream. You will need to prove that you're actually going to generate a decent cash flow. Lenders will often ask for a cash flow statement for a property showing its rental history. Management companies or condo associations often provide them. If one isn't available, you'll need to get a second appraisal, comparing the rents and occupancy rates at similar homes. This will run an extra $300 to $600.

In short, while renting your property is an attractive option, there are definite differences in financing a vacation home versus financing a rental/investment property.