Are You Ready for a Summer Home?

by Stephanie A. Chisholm


Is it a beach cottage on the ocean? A lakeside home in the country? Ora ski house in the mountains? Whatever vacation home fantasy is on yourmind this summer, it could be time to consider owning that dream and notjust renting it. For many families, there is no better vacation than returningto the same home year after year, to build a lifetime of happy memoriesat "the summer house."

Before jumping into that home, potential buyers would be wise to considerthe real pros and cons of owning a vacation property as opposed to justrenting.

Are You Ready for That Vacation Home?

Obviously, a vacation home is not the optimal choice for the traveler.Those who always need someplace new to visit and get bored staying in oneplace should not even consider buying a permanent vacation home. Buyinga summer home means making a commitment to one geographic location and alifestyle. Without a strong desire for the vacation home lifestyle, a consumeris wise to consider possible alternatives. On the other hand, for thosewho work hard and like to get away from it all and relax on vacation, asecond home by the beach, a lake or mountainside resort may be the perfectgetaway. For many families, a vacation home also gives parents a good basefrom which to take care of children.

My father, Joseph Chisholm, purchased a summer home in Laurel, New Yorkon the North Fork of Long Island back in 1972. In 1997, my parents decidedto retire there after spending 26 fun-filled summers on the shores of theGreat Peconic Bay. He says, "One advantage of a summer home at or nearthe water is that it is a tremendous chance for relaxation. If you haveyoung children or grandchildren, it is a wonderful environment for themto learn how to swim, sail and enjoy their summers." Mr. Chisholm pointsout other hidden advantages of owning, commenting that "you can alwaysrent it at a fair price for a short period and cover some of your expenses.The second reason to own a summer home in a choice location is that youcan swap it for other places in the world for a as little as a week or upto a season for an occasional change. It's not very hard to arrange-manyRealtors can help you find a willing party."

Our family rented in the immediate area for several years before decidingto buy a summer home there. We advise vacation home buyers to experimentwith different vacation destinations, then rent in the area for at leastone summer before actually buying. Spending a month or an entire summerin an area gives a good indication of what owning there would actually belike.

Is Joint Ownership a Good Idea?

Sharing the cost and upkeep of a vacation home with family members orclose friends is an alternative to buying alone. Before considering thisoption, buyers must first find people who share the same vacation home goalsas themselves and have the financial capability to share in both the purchaseand the on-going costs. Potential partners should be immediate family orlong-term friends-people who with whom you will feel comfortable makingrules and enforcing them, as well as managing the day to day maintenanceof the property.

Sharing a vacation home also often means sharing a mortgage to help purchasethe property. Borrowers should be extremely cautious and make sure thatpotential partners do not financially overextend themselves to participatein the purchase. If problems occur down the line, it is possible that anotherpartner may be unable to continue payments, leaving the remaining partneror partners with all of the expenses to pay. A partnership agreement draftedby an attorney should definitely be used for anyone considering buying realestate with friends or family. Because of the many potential pitfalls ofbuying a home with partners, vacation home buyers should probably shy awayfrom this option unless the property is so spectacular that sharing it wouldbe a better option than having sole ownership of a smaller property.

Financing Your Vacation Home

Most lenders now allow buyers to purchase vacation homes with a 10% downpayment. To qualify, a borrower's total debt burden should not exceed 40%of his or her gross monthly income. Total debt burden for this purpose isdefined as the principal, interest, taxes and insurance payment on botha primary residence and the vacation home, along with all other monthlydebt payments. For borrowers who meet this qualification, along with othernormal credit requirements, nearly every loan program is available at standardpricing (i.e. for the same rates you would normally get on your primaryresidence).

Many borrowers obtain the down payment for their vacation home by takingout a home equity line on their primary residence. If the borrower can affordthe monthly debt payments of the equity line, this technique can be an easyway to get the cash for the vacation house. Almost all lenders allow borrowersto use equity lines for down payments on other homes (see Home Equity articlein this issue).

Four issues often arise when a borrower applies for a vacation home loan.One occurs when the property being purchased is a condominium form of ownership.Most lenders require condominiums to be primarily owner occupied and maynot finance a home in a project where investors own more than 40% of theunits. Vacation homes often are owned by investors and rented out for partof the year, so it is important to find out details of the association beforemaking an offer.

The second type of problem arises when a vacation home is a two-familyproperty. There are many summer homes that have a main house and an apartmentthat is rented for income purposes or occupied by a caretaker. Fannie Maeand Freddie Mac guidelines at present do not allow vacation homes to bemore than single family properties. Although exceptions may occur, a borrowermight be better off contacting a local portfolio lender to finance a vacationhome with more than one dwelling unit.

Third, most mortgage guidelines dictate that a vacation home can notbe in the same local area as a borrower's primary residence. Lenders makeevery effort to insure that borrowers are not using the second home programfor investment purposes. For most borrowers, this is not a problem. Butin many areas it is common to vacation locally, so buyers should be preparedto make their case to a lender to prove that a local property will be usedfor vacation purposes only.

Finally, vacation home owners will find it more difficult to borrow againstexisting equity if they seek to execute a cash-out refinance of the property.Although a consumer can borrow up to 90% of the value of a vacation hometo buy it, most lenders only allow owners to refinance up to 75% of thecurrent value of the property. Those consumers seeking to use equity inthe property in later years for college educations, for example, shouldmake plans keeping this factor in mind. Equally important, vacation homeowners should be aware that values fluctuate wildly during economic downturns,as vacation home markets get hit much worse than normal home markets.

A vacation home can be utilized as an investment to decrease costs, butleasing to other vacationers is much more than simply cashing a rent checkand always involves tenant management. (See Real Estate Investor articlein this issue). Essentially, owners who rent their home out will be in thehospitality business, and must be prepared to meet the needs of vacationingtenants. Renting on a regular basis is almost the same as sharing ownershipin that the property will be used by more than one occupant.

Although there are several pitfalls to financing a vacation home, adequatefinancing is readily available to qualified buyers. The mortgage marketstoday have more than sufficient programs to meet the needs of vacation homebuyers. And despite all the potential problems that can occur, there iscertainly nothing better than lying on your own stretch of beach in thewarm sun with the waves lapping at your feet and the gentle summer breezeblowing.


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