Why A Second Home Mortgage Is Harder To Come By And A Few Alternatives

If you’re like most Americans, you’re probably not in the market for a vacation home right now. But real estate values, especially in the inflated resort areas, are still extremely depressed and the economic malaise can’t last forever. If you can afford to take on a second home mortgage and you can find a bank to lend to you, now might be the best time in decades to buy.

Second Home Mortgage Rates Are Higher

But there’s a problem: banks are a lot stricter when it comes to underwriting second home mortgage loans. Consequently, you can expect to pay 0.25-0.5% more for a mortgage on a vacation home than for your primary residence. Why?

1. Vacation home owners tend to be stretched just a bit thinner than their single-home-owning counterparts.
2. People are a lot less attached to their vacation homes than to their primary residences. In times of trouble, most people will cut everything back to the bone in a desperate attempt to stay in their homes. Not so for vacation homes. Banks naturally tend to assume you’re more likely to default on your vacation home mortgage and charge a higher rate to compensate themselves for the additional risk.

Some Alternatives

Now if you are truly affluent, paying an extra 0.5% won’t be a problem for you and you’ll likely have no trouble getting approved. Then again, if you’re really bringing in the big bucks you probably wouldn’t need to borrow money to buy a second home in the first place. In any event, the rest of us (the not-quite-affluent-but-still-pretty-well-off crowd) would prefer not to pay all that extra mortgage interest if we can avoid it. Luckily, there are a few alternatives.

Cash-Out Refinance On Your Primary Residence

There is some risk to this strategy, but I think it’s minimal assuming you a.) either own your primary residence outright or else have a lot of equity, b.) have the cash on hand to make up the difference between what you can pull out of your primary residence without mortgaging yourself underwater and what the second home costs. This way, you can qualify for the absolute lowest rates available, potentially saving you tens of thousands of dollars. And if you get into trouble? Well, you can always sell the vacation home. Yes, if prices drop precipitously and you lose your job and life savings at once you might be in trouble, but despite recent events I think this is a prudent risk.

Take Out A Second Home Loan But Rent It Out A Few Weeks Per Year

How many weeks out of the year will you realistically live in your second home? 12? 30? If you aren’t going to be there most of the year, renting the house out even for just a few weeks per year could generate more than enough income to make up for the slightly higher mortgage payments. Careful, though. Mixing business with pleasure can lead to some tricky tax situations and could even endanger your second home mortgage interest deduction. You should definitely consult your tax accountant before doing anything like that.