The time has finally come when you’re ready to take the big step: building or buying your dream getaway—a second home in the mountains, alongside a lake or near a stretch of pristine coastline. If it’s been awhile since you’ve financed a home, you’ll find the process has gotten easier. Here are some tips:
The 411 on Second Homes
- If you’re looking to buy your second home with little or no down payment, you’re likely to pay a little more for the loan, a higher interest rate or more points.
- The home can’t be in the same town as your primary residence. If it is, Regency assumes it’s an investment property, not a vacation home.
- If you plan to rent out your home regularly, a lender is likely to view your new home as “rental property,” which to the lender means a riskier loan—resulting in a higher interest rate and a substantial down payment (about 20 percent).
- The IRS sets up a tax guideline that says if you rent your home out at fair-market value, you have to occupy it for more than 14 days annually, or more than 10 percent of the days that it was rented out, whichever is greater. If you don’t, it’s rental property.
Some lenders are more hospitable to loans for second homes than others—a host of web sites makes it easy to compare rates and costs, including bankrate.com and HSH Associates.
Creative Financing Options
Line of credit or a “cash-out” refinancing of your first home uses the equity in your existing home to help finance the second. (Keep in mind that home-equity lines of credit are capped at $100,000 and the rate usually floats a point above the prime rate.)
Interest-only equity loans also can offer great value in the right situations. This type of loan promises low monthly payments for a specified period of time, during which you’re paying only the interest on the loan. (Of course, you’ll pay on the loan itself eventually so be sure you’ll be ready for it when the higher payment finally kicks in.)
Be sure to consider the total cost of your new purchase. Insurance costs are often notably higher for a second home because the property sits unoccupied for much of the time. Hiring someone for maintenance can be necessary. Finally, all the experts say you should be careful about believing you’ll earn enough off renting your property to consider it a money-making venture. Some people have found that it can be a good investment, but as a caution, you might not want to buy or build one for that reason alone. You should buy because you’ll really use it and enjoy it. And for many, that’s what building a log home is all about.