Real estate prices remain low almost everywhere, even for houses on the 18th fairway, in the city, at the lake or somewhere in a Sun Belt city that caters to retirees.
With good deals out there, it is worth considering purchasing a vacation or future retirement home sooner rather than later — but what are the financing options?
While some of the most attractive types of financing are restricted to the purchase of primary residences, there still are many mortgages available for credit-worthy, second-home buyers.
The kind of mortgage second-home buyers should get depends on how they plan to use their new property. A weekend getaway for immediate use might be financed one way while a property purchased in anticipation of retirement down the road could be handled quite differently. The planned use should influence the choice of property as well as the mortgage used to buy it.
“You always hear how important location is, but with a second home, buyers have to ask ‘Why this location?'” said Jason Haber, chief executive officer of Rubicon Property LLC, which will open a Washington office soon. For a vacation home the answer is usually simple: “I love the ocean” or “I want to spend my weekends in the city.”
“But for a future retirement home, location should be considered from the standpoint of a temporary investment rather than an immediate lifestyle,” he said. “You should consider the area’s future ‘resaleability’ as well as its present usability.”
Justin J. Exner, a loan officer at Fairmont Independent Mortgage in Haymarket, Va., said while Federal Housing Administration and Veterans Affairs loans cannot be used for second homes, conventional mortgages are widely available for that purpose.
“The qualifications are about the same as for a primary residence,” he said. “Borrowers need 20 to 25 percent down, great credit and be able to meet the debt to income ratios.” Of course, it takes significant income to meet the ratios for buyers who already have one mortgage.
Conventional mortgages specify owner occupancy, with small exceptions for occasional one- or two-week vacation rentals, so people who expect their future retirement home to provide an interim income stream will need a commercial or investor mortgage.
Investor mortgages allow part of the rent to be considered as income, which usually helps the ratios, but Exner said the interest rate would be a quarter-point or so higher than a conventional mortgage. Loans on properties for personal use versus those for rentals each have their own tax ramifications.
He advised buyers to consult a tax adviser before structuring a second-home purchase, especially with all of the talk in Washington about eliminating the mortgage deduction for second homes.
Haber, who has an office in Manhattan in New York, which he calls “a big second home city,” said many buyers pay cash for second or even third and fourth homes. Not everyone has that level of resources but many people nearing retirement have substantial equity that can be tapped to finance part or all of a second home.
A home equity line of credit also permits flexibility with the rental issue and could work particularly well if retirement is near and financing two homes is only a temporary issue.
Finally, developers of new vacation and retirement communities often line up a lending partner to finance the units.
Exner warned that, while such prefabricated financing may make the process easier, since the property itself is qualified, it also can be expensive. He said buyers should get at least two other quotes and check Box 1A on the Good Faith Estimate for both the interest rate and the lender’s fee.
