Battling thousands of other vacation-goers at the height of summer to book the best hotels is never fun. The last thing you deserve is having to settle for a below-par location — or even worse — cancel your vacation until something better becomes available. However, this is never an issue when you own your own vacation home.
With a second home in your ideal location, you’re guaranteed to enjoy a comfortable vacation whenever you want, create a new revenue stream, build home equity and prepare for a peaceful retirement. But how do you go about financing a vacation home? Here are your options when deciding on how to pay for this luxury.
- Use Your Savings Or Inheritance
- Remortgage Your Property
- Opt for a Conventional Loan
- Consider a Home Equity Loan
- Look Into a HELOC
- Use Rental Income
Disclaimer: This blog is purely intended for informational purposes and shouldn’t be used as a substitute for financial advice. Please seek professional financial advice before financing your vacation home.
Use Your Savings or Inheritance
Not all vacation homes are expensive, but you need to make sure you have enough budget for even a relatively affordable second home. If you’re lucky enough to have savings or an inheritance, you can finance your vacation home that way with cash, even if it’s with your friends or family.
An all-cash purchase is perhaps the best way to finance your second home if you’re able, as there’s less red tape involved and the process is typically smoother than other options, as long as you have the correct documents. Here’s why using your cash savings or inheritance is a good idea when financing a second home:
- Attractive Buyer: Sellers know mortgages can take a while, especially if applications are unsuccessful. Proving you’re financing your vacation home with your cash savings or inheritance means sellers will take you more seriously.
- Better Deals: Using cash puts you in a great position to bargain. Sellers know that the sooner they get their money, the better they can make use of it.
- No Mortgage Hassle: Mortgages require substantial documents, meetings, solid incomes and bulletproof credit records before you’re approved. Using cash means you avoid all of this.
- Don’t Worry About Mortgage Payments: You’ll never lose a night’s sleep about an upcoming mortgage payment, knowing you paid off your vacation home up-front with cash savings.
- A Comfortable Retirement: Peace of mind is essential when buying a vacation home. Using cash to finance your vacation home means you can enjoy your retirement without mortgage payments looming.
No lending arrangements. No hassle. Use cash savings and enjoy stress-free vacations in your second home.
Remortgage Your Property
Taking out a mortgage might seem the obvious method for many, just like you’d apply for a mortgage for any other property. However, applying for a second mortgage can be tougher to qualify for, as lenders usually want bigger down payments and higher interest rates.
Plus, if you already have a mortgage on your primary residence, you need to show you have enough income to support two mortgage payments.
More popular is remortgaging or refinancing your existing property. This would replace your current loan and create a much larger mortgage agreement encompassing your primary home and your new vacation home.
Opt for a Conventional Loan
A conventional loan is another way to finance your vacation home. Here, you'll need to meet the strict criteria or pay higher down payments (this can range between 10% to 35%), agree to higher interest rates, have a stellar debt-to-income ratio and boast an impeccable credit store depending on the lender.
Many conventional loans create separate terms for vacation homes for owner-usage versus vacation homes that will be rented out. The former type of loan prohibits creating revenue through rental.
Suppose you want to finance your vacation home with a conventional loan. In that case, you’ll need to fully document your assets and income for a loan as the lender needs to see enough cash reserves to ensure you have enough to handle two payments — one for your current residence and one for your vacation home.
Consider a Home Equity Loan
A home equity loan is similar to a mortgage. The equity in your home serves as collateral for the lender and works like a conventional mortgage in that you have a set repayment term. This is an excellent financing option for your vacation home if you want to convert the equity you’ve built up in your home to cash.
Seek financial advice before applying for a home equity loan or any financing option on this list. While home equity loans are easy to obtain, offer lower interest rates than other debt and can lead to a possible tax deduction for the interest paid, they can cause problems if you don’t plan correctly, such as home foreclosure.
Look Into a HELOC
A Home Equity Line of credit (HELOC) is another financing option to consider for your vacation home. It’s a way to borrow against the equity of your home and if you have enough, you can take out a line of credit and either purchase your vacation home outright or use the funds to make a downpayment.
A HELOC means you don’t need to refinance your existing mortgage, so you’d keep your initial mortgage intact but add another loan with separate terms. A HELOC is attractive to many vacation home-buyers with excellent credit, as opening a line of credit doesn’t affect your first mortgage.
However, lenders don’t always favor this option, depending on your current financial situation and the estimated timeline of paying off your loan in its entirety.
Use Rental Income
This method of financing a vacation home will work if you have a property that you rent out, as you can use the funds from your rental income to help finance your vacation home purchase. The most popular options through rental income are short-term (holiday rental) stays or permanent tenants, like remote workers and locals, for example.
The best way to maximise the average daily rate and occupancy on your vacation home is to buy a branded residence, like the ones offered by Hilton. Having a big hotel support your rentals with a 24/7 global reservation system will not only optimise rental income but will also take the stress of marketing away from you.
When considering your financing options, make sure you budget for more than the property price itself. If you don’t work with a property management company, you’ll also need to budget for things like maintenance, utility bills, repairs and more.
After seeking professional financial advice and having a better idea of how you’ll finance your vacation home, the next step is deciding on your dream location. When researching your options, assess the area as it is now and also what it could look like in the future.
There’s something for everyone in Bermuda. Home to Bermudiana Beach, Tapestry Collection by Hilton, Bermuda is the ideal opportunity to purchase a vacation home. To help explain why, make sure to check out our latest guide to see a full list of reasons why Bermuda is home to the best vacation home opportunities.
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