What You Should Know Before Buying Your First Vacation Home
If you’re considering buying your first vacation home, you aren’t alone. More homeowners are moving into the vacation home market while interest rates are low and prices are still affordable. However, buying a vacation home isn’t quite the same as buying a primary residence. The vacation market is different from the traditional housing market, financing requirements differ, and homebuyers have a different set of options to weigh. Here’s what you should know before you buy.
By most accounts, the vacation home market is doing quite well. Sales were the highest in a decade last year, with 1.13 million properties sold. That’s six percent above the 2006 peak and 57 percent up from the 717,000 homes sold in 2013, according to the National Association of Realtors (NAR).
What hasn’t reached peak 2006 levels are the prices second home buyers are paying. In 2005, the median second home price was $204,000. Today, a vacation home can be had for an appealingly low median price of $150,000.
Buyer confidence is also different today than it was before the recession. According to Urban Land Magazine, the perceived risk of buying a second home today is moderate to high. A decade ago, few second home buyers gave such risk a second thought. Yet spiking sales suggest buyers are still optimistic, even if they are a bit more cautious.
These cautious yet optimistic buyers are a diverse group. A recent piece in the Fort Wayne Journal Gazette reports that baby boomer buyers are jumping into the market thanks to favorable price points, with beach resorts in the South and West being particularly appealing. However, the retirees aren’t alone. In an Urban Land survey of Hawaii vacation homes, families with children at home represented the largest group of buyers, while buyers in their thirties were also well represented, making up 14 percent of sales.
Overall, today’s vacation home buyers are taking up a big slice of the market. More than one out of five homes bought in 2014 was a vacation home, according to an NAR survey. The same survey found that today’s typical second home buyer had a median household income of $94,380 and purchased a vacation property an average of 200 miles away from their primary residence. With 40 percent of the market, the South was the most popular place to buy, with vacation homes in the West, Northeast, and Midwest trailing behind. More than half of buyers went with a detached single-family home, and 40 percent opted for a beach home.
When it comes to purchasing options, some buyers are choosing cash sales over financing. “Thirty percent of all vacation home sales [in 2014] were all-cash purchases,” Jessica Lautz, director of surveys and communications for NAR, told the Journal Gazette. For buyers who financed, Lautz noted almost 50 percent made down payments of 30 percent or more.
However, an estimated 70 percent of buyers are financing their second homes. Urban Land Magazine’s report found that even the wealthiest of buyers were financing vacation homes in order to take advantage of low interest rates.
For those readers considering a second home purchase with financing, it’s worth pointing out second home financing differs somewhat from first home financing.
Notably, loan program options for a second home are more limited than for a primary residence. FHA loan programs, popular for the low down payment options they offer, aren’t available — these are intended for primary residences only. That means conventional loans, which typically require higher down payments, are the main financing tool for second home buyers. With a conventional second home loan, buyers should also anticipate a higher interest rate and more stringent borrower requirements.
Vacation home buyers should be prepared to show a lender that they can handle the added debt, with mortgage payments for both a primary residence and a vacation home coming in below 28 percent of your pre-tax income. Lenders also want to see total monthly debts below 36 percent of pre-tax income. Investopedia notes vacation home borrowers may also need to meet higher credit requirements, with scores of 725 or 750, and some lenders may require a down payment of 30 percent or 35 percent, particularly if a second home purchase requires a jumbo loan.
However, one perk of financing your vacation home purchase is today’s historically low interest rates. While a conventional or jumbo loan interest rate will be higher for a second home, it’s still far belowwhat a borrower would’ve paid before the recession.
Beyond the market and financing options, make sure the vacation home you pick suits your needs. Of course, each buyer’s needs will be unique and different buyers will have different priorities. Here are some options to consider:
Detached home or condo? If you’d prefer a single-family home over a condo or row house, you’re in good company. NAR found more than half of buyers, 54 percent, opted for a detached vacation home. Slightly more than a quarter chose a condo, while 18 percent chose a row house as their vacation property.
Beach or mountains? NAR’s research found that 40 percent of vacation home buyers bought property near a beach in 2014. Seventeen percent opted for a home near the mountains. A buyer who enjoys hiking or boating should take a vacation home’s locale into consideration. Which season you prefer to vacation in may also play a role in your choice. A ski resort home may not be the best pick if you prefer summer vacations.
City or country? Of course, it’s also possible to buy very different beachfront or mountain properties. Consider Miami Beach versus Outer Banks, N.C., or Boulder, Co. versus the rural Appalachian Mountains. Urban Land reports 43 percent of vacation home purchases last year were in urban or resort areas, with the trend toward urban locations reportedly on the rise.
High insurance costs? Bankrate points out that a beautiful beachfront or lakefront home may come with significantly higher insurance costs due to the risk of flooding and storm damage. Bob Cabrera, a national consumer lending sales manager with Regions Mortgage, told Bankrate that it’s become increasingly difficult and costly to get flood insurance in some coastal markets, a budgetary factor worth considering if you choose to go with a coastal home.
Personal use or rental use? Some vacation homes are strictly for vacations or family retreats — one in three according to NAR’s survey. Other vacation home buyers may put their property to use as a rental when not in use. Bankrate notes that some states may impose higher property taxes for homes used as rental properties, and your ability to take mortgage interest deductions on your personal tax return may also be impacted.
Short-term or long-term ownership? Another important question to answer is how long you intend to own your vacation property. Buyers in the NAR survey reportedly planned to own their vacation homes for a median of six years. However, 19 percent said they wanted to use their vacation property as a primary residence at some point in the future.
Like any home purchase, buying a vacation home takes planning and research. With low interest rates and below-peak prices, now is a great time to buy. Finding a lender and real estate agent who are familiar with the unique circumstances of a vacation home purchase is a must, but with 20 percent of the market share now going to vacation home buyers, this shouldn’t be too difficult. Make sure to prioritize what you’re looking for before jumping in, and work closely with your agent and lender to make sure the home you pick suits your needs.