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Is it time for a second American Dream?

Karen Mayfield
Mortgage Banking

As the economy improves, many people who have achieved the American Dream of homeownership are beginning to think about achieving a second American Dream — owning a second home.

Blue two-story beach house.In fact, almost three-quarters of a million Americans did just that last year. More than 715,000 vacation homes sold last year, up 30% from 2012, according to the 2014 Investment and Vacation Home Buyers Survey released April 2, 2014 by the National Association of Realtors (NAR).

If you’re interested in a vacation home, notice the title of the survey. Investment properties and vacation homes are talked about together a lot. Anyone who owns a second home in a vacation area will sooner or later be asked, “Are you going to list it on a vacation rental site, such as Airbnb or VRBO.com?”

Vacation home vs. investment property

But as a prospective buyer, you need to understand the difference between a vacation home and an investment property. During the loan application process, be clear with the lender how you intend to use your second home: as a getaway or as an investment property to rent.

Many people buy a vacation home not certain whether they will rent it out or not. Often times, it’s not until you own the property that you truly know how much you will use it, and whether it is worth your time and effort to rent it out.

If you are debating the possibility of renting out your future vacation home, keep in mind what you tell your lender may save you money or cost you money. Mortgage lenders consider an investment property a higher risk than a vacation home. To compensate for that higher risk, the loan may likely have higher costs.

Communications with your lender

If you are certain that you will be renting out your vacation home, you should share that with your lender. In the loan process borrowers are asked to sign an owner occupancy affidavit to verify their intention to occupy a property. In the case of a refinancing on a vacation home, the owners attest to the fact that they currently occupy the property.

If the place you are buying is a vacation home for personal use, the loan will be priced and underwritten based on your current income.

Here’s one final tip for those who already own a second home that you decided to rent out after you got your mortgage. If the property was considered a vacation home when you got your original mortgage and you now want to refinance, your new loan may be underwritten as an investment property. You should discuss your situation with a loan officer to ensure you and the lender are clear on the type of loan you’re seeking and your lender’s practices. If the rental income shows up on the tax statements you provide as part of your mortgage application, then your lender may classify the property as a rental property and price your new mortgage accordingly.

With interest rates still relatively low and the economy improving, the outlook for vacation homes is promising.

NAR Chief Economist Lawrence Yun expects an improvement in the vacation home market. “Growth in the equity markets has greatly benefited high-net-worth households, thereby providing the wherewithal and confidence to purchase recreational property,” he said. “However, vacation-home sales are still about one-third below the peak activity seen in 2006.”

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Want to learn more? You can use the Bank of the West site to find a local mortgage banker and check rates.

 

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