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A Home for the Holidays

housing optimismFamilies frequently start the New Year by planning out their short- and long-term goals. The winter season often reminds them of their dream of buying a vacation home to visit on weekends and holidays or as a place to retire or pass on to their children. While a vacation home is certainly a luxury, there are benefits to purchasing one and ways to make the dream of buying a second home a reality.  

Buying a vacation home is a big decision that is motivated by life situations like pursuing a retired lifestyle and building new memories with extended family. But before that, one of the most important considerations for the buyer is how to balance this major purchase with the household’s overall financial situation by assessing how much should they borrow without putting the rest of their financial plans on hold.

The First Steps

As experienced professionals, you can help vacation homebuyers determine whether they can afford to take on a second home mortgage. Do they have a stable income and a cash reserve? Generally, lenders want a borrower’s debt (including the potential new mortgage) to represent no more than 36 percent of his/her monthly pre-tax income. Also, help clients anticipate expenses beyond a monthly mortgage, like furniture, maintenance, utilities, insurance, property taxes, and property management fees.  

Work with a lender who can explain loan options to fit your clients’ finances and their lifestyle, ensuring that they can handle the costs of an additional property. Before they start looking at properties, vacation homebuyers can also be prequalified or preapproved for a loan. For example, if they are a Bank of America client, they may be eligible for a reduction in their mortgage origination fee based on their eligible balances at the time of their application.

Borrowing Options

Borrowers will find that available interest rates frequently decline as their down payment increases, so a larger down payment will result in a lower monthly payment. Loans available for vacation homes tend to be more conservative than those for primary residences, and borrowers may need a down payment of 20 percent or more.  

Another option is to tap the equity in a primary residence to buy a second home, either using a home equity line of credit (HELOC) or a cash-out refinance. Buyers can opt to take out a HELOC on their primary home and use those funds for a down payment to purchase a vacation home. Make sure you help clients understand both the benefits and potential risks since borrowing against the home isn’t necessarily right for everyone and every situation. It’s important for them to know that with a HELOC, they’re borrowing against the available equity in their home and their primary residence is used as collateral for the line of credit.   

Explaining the Benefits

Owning a second home can bring potential tax benefits depending on the type of property purchased and how it is used. A second home for vacations is different from an investment property that is purchased to generate income. That difference can affect a buyer’s finances, including the taxes owed on the property and the type of insurance coverage needed. Refer your clients to a tax professional for guidance on how a second home purchase could affect their tax obligations.

Many vacation homebuyers may have had the experience of buying a home on multiple occasions, however, keep in mind, it may be the first time for some who are buying a second home. Thus, there will be clients who may find the vacation homebuying process complicated. Help them make an informed and confident decision by partnering with a lender who can help them consider their goals, analyze their finances and explain their mortgage options.

About Author: Ann Thompson

Ann Thompson, SVP, Divisional Sales Executive, Bank of America, manages the Northern California Division for Consumer Lending, including 400 lending officers, in addition to their management team and support staff. The lending team originates approximately $10 billion in first and second mortgages for Bank of America/Merrill Lynch clients and also for clients introduced by real estate agents, builders, and previous clients. Thompson has enjoyed a 28-year career in banking, with a consistent emphasis in consumer lending, structured high net worth client lending, and commercial lending. Thompson serves on the Board of Trustees of the Oakland Museum of California and was named one of the “Bay Area’s Most Influential Women in Business” by the San Francisco Business Times in 2016 and was added to their “Forever Influential” list in 2017. She lives in the East Bay with her husband of 30 years and has two sons.

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