FINANCE

PURCHASING A VACATION HOME

GOT CABIN FEVER? BUY A CABIN

BY JAMES PATRICK

HISTORICALLY LOW MORTGAGE RATES, NEW TELECOMMUTING FLEXIBILITY, and the reality of shelter-in-place’s “cabin fever” have many considering the purchase of a vacation property.

Over the past year, many have seriously considered taking the leap and buying their own mountain getaway or ocean condo retreat. A vacation home is a luxury to enjoy now and may also be a good investment as property values rise.

Why not have some fun this spring and plan a house hunting trip to your favorite destination? Or browse properties online from the comfort of your couch through Realtor.com or Zillow.com. It can’t hurt to look and dream, right?

Before you start shopping for your refuge, some important factors to consider:

• How accessible is this retreat and how

often will you realistically enjoy it? Is this a two-hour Friday afternoon commute? Or a ten-hour trek with two connecting flights?

• How much can you afford monthly? Don’t forget to add taxes, insurance, association dues, utilities, and property maintenance.

• Will you need to rent the property when not in use? If so, what’s the going rate in the area for a property that size? What’s the seasonal occupancy rate? What’s the cost for property management?

There is a distinction between a vacation home and rental property that buyers should clearly understand because they are financed differently by the banks. And they are treated differently for mortgage interest tax deductions by the IRS, so please check with your tax planner.

Vacation Home Loans

A true vacation home is typically considered a secondary residence and must be at least 50 miles away from your primary home. It’s intended primarily for your use. The rates are similar to that of financing a primary residence with some banks charging a slightly higher interest rate of .25%.

Lenders may require a higher credit score as well as a larger down payment for vacation homes. For example, a primary residence allows for down payments as low as 3%. But for a vacation home, you may need 10 – 20%. With these types of loans, you would need to show income that can support both your primary residence and vacation property. No rental income would be included to qualify.

Rental/Investment Property Loans

If you do plan to rent out your vacation home, it’ll be classified as an investment/rental property and will fall under other underwriting guidelines and pricing. You may expect to pay a slightly higher interest rate of 0.50% to 0.75%.

You’ll likely need to put at least 20% down and have a solid credit score. Your lender will also request a comparable rent schedule included with your appraisal. The good news is that your lender will consider a portion of the anticipated rent as income to qualify you for the loan. (Others will help pay for the expense of your getaway!)

But in either case, with mortgage rates below 4%, now may be a good time to lock in a fixed rate on your vacation property.

Other Financing Options

Don’t have the down payment but do have equity in your primary residence?

A 30-year cash-out refinance may be the way to go. Pull the equity from your primary residence and pay cash for your vacation property. With this option, you’ll refinance your first mortgage loan at today’s rates and add on to the loan the amount needed for your vacation home purchase.

Is your first mortgage locked in at such a low rate that you don’t want to touch it? Another option for you is a home equity loan (typically fixed-rate) or home equity line of credit (typically variable rate). These loans are appealing for their quick processing time and low closing costs. But they are often financed over a shorter 15-year period, which can make payments higher.

A third option may be to purchase the property with other family members or friends. Going in with four parties with each sharing a 25% ownership, could avoid the need for a bank loan altogether. Just be sure to develop a written ownership agreement before making the purchase. This will spell out who may use the property and when, how expenses will be shared and how the sale of one party’s share would work.

Happy Hunting

A home away from home can offer priceless memories, a needed sanctuary where you can unplug and de-stress from life in the city, a long-term investment or even a place for you to spend your golden years. Just do your homework and know all the numbers before writing an offer.

Stay Money Wise

If you missed past personal finance features, which include Budgeting and Credit Scores, you can find them online at www. metrosource.com. ■

This information is intended to provide general guidance. We encourage you to consult your financial advisor and tax planner to review your individual situation before making any significant financial decisions.