We’ve already alluded to one of the benefits of owning a vacation home: having a place to call your own.
There are other benefits, too.
If you vacation often, you could save money in the long run. Vacation rentals during peak seasons like summer or the winter ski season can get expensive. They might equal or exceed the cost of annual mortgage payments on a place you own outright.
You could generate income by renting out your vacation home.
Your vacation home may appreciate in value over time, providing you with an investment that builds wealth.
There could be tax advantages to owning a vacation home. (Consult your tax advisor.)
You have a place to potentially retire to.
You have a place you can go to anytime, year-round, to relax and get away.
You have a place to entertain family and friends and start new traditions.
The Realities of Owning a Vacation Home
As with most things in life, owning a vacation home does have its flip side. None of these are insurmountable, but you should be aware that when you own a vacation home:
Depending on the location, vacation homes can be expensive to buy. A condo or small cabin in woods is within many people’s reach, but waterfront property on a sandy beach might not be.
You will be paying a mortgage, property tax, insurance, utilities, and maintenance expenses for two homes.
Real estate isn’t as liquid an asset like stock or bonds. While real estate generally appreciates over time, there are occasions where prices drop. If you need to sell during a market or economic downturn, you may have to take a reduced price.
In some places, you may not be able to rent your property. Or, there are restrictions on how often and how long you can rent.
Financing a vacation home is different than financing your primary home. How so?
If you already have a primary home mortgage, the vacation property mortgage will be considered a “second home” mortgage.
Second home mortgages sit between primary home mortgages and investment property mortgages.
Second home mortgages are a bit tougher to qualify for. Lenders often want larger down payments. And the interest rate may be higher. Why? The reason is, a vacation home represents a larger risk to the lender. If a homeowner is having trouble making the payments on their vacation home vs. their primary home, most owners will make their primary mortgage payments. This puts the second home at greater risk. Lenders want larger down payments to ensure borrowers have more skin in the game.
If you have a primary home mortgage, your income needs to be high enough to justify both the primary and secondary mortgage payments.
Vacation Home vs. Investment Property
One thing in your favor when it comes to financing a vacation property home is, if you plan to use the property as a true second home, it’s less expensive than if you plan to use it as an investment property.