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Second Homes and Vacation Homes

2005 was one of the hottest years on record for people buying second homes with over 21% of all purchases being second homes. Driving this trend is the availability of capital for baby boomers from harvesting the swelling equity from primary residences as home values soared over the last few years.

Some areas like Destin, Florida averaged over 25% appreciation in 2005 alone. Hot areas are, as suspected, homes near the beach, like the Destin area, mountains and other recreation areas. According to the National Association of Realtors, for markets where over 10% of the homes are seasonal, there was a 59% increase in value from 2001 to 2004.

Also helping in the growth is the publicity given to the real estate investment industry with infomercials like Carlton Sheets focusing on the low down payments required. In some cases 5% or less is all that is required to get you interest rates that rival those for primary residences.

Lastly the popularity of low payment loans like the interest only and cash flow option arm have joined the low down payment programs so that the homes are cheaper to get into and cheaper to hold, at least on the short term.

Also helping in the growth is the publicity given to the real estate investment industry with infomercials like Carlton Sheets focusing on the low down payments required. In some cases 5% or less is all that is required to get you an interest rates that rival those for primary residences.

Lastly the popularity of low payment loans like the interest only and cash flow option arm have joined the low down payment programs so that the homes are cheaper to get into and cheaper to hold, at least on the short term.

Condos in beach resort and/or ski resort locations are often purchased as second homes. There are different kinds of condos projects and each project type must adhere to specific loan guidelines.

Knowing the difference between a second home and an investment is important. It is clear that financing for second/vacation homes is more relaxed and cheap. To claim an investment property is actually a second/vacation home is treated as loan fraud by federal agencies. And though it may be tempting to try to qualify your home as a vacation or second home, even though it really is intended for an investment property; it is best to not try and fool the lender's underwriter. The borrower is not the only person who could be implicated for loan fraud.

To be considered a 2nd home you are not allowed to own more than two second/vacation properties. Any more than two second/vacation properties and you may have to consider it an investment property.

Appreciation is still very high and should stay that way in many vacation hot spots

You may be asking yourself why real estate is such a good investment. Let's look and see why it is such a good investment. You average home's appreciation rate is around 5% per year.

The numbers look like this:

Year 1 - 100,000 home value when you buy
Year 2 - 105,000
Year 3 - 110,250
Year 4 - 115,762
Year 5 = 121,550

As you can see it doesn't take long to build up some equity in your house. If you bought a 200K home then those numbers would be double. This example is not even taking in into account that you are paying down the principle balance on your loan. If you have your home on an interest only or pay option loan then you are probably cash flowing each and every month too.

Option ARMs are excellent tools for investors seeking rental income, particularly on seasonal properties. You have the option to keep your payments low when the property is empty, and manage your cash flow while the property is booked or rented.

Keep in mind that if it is a second home or investment property, there may be loan to value restrictions.

Some of the factors that lenders look at when qualifying a home as a "second home" are:

1. Distance from primary residence
2. Location
3. Is the home being used for "personal" use

Whether you live in Ohio and are looking for a second home, vacation home or investment property elsewhere or live elsewhere and are looking to buy a second home, vacation home or investment property in Ohio, I can help you obtain financing.

When looking to buy investment properties and vacation properties the loan program that you select for your financing can be crucial. Interest only loans and pay option ARM's are very good options to help with self-employed and commissioned employees. Also interest only and pay option ARM's can help a borrower to maximize cash flow on a monthly basis by providing the lowest possible payments so that you are not as financially tapped for money each month. Utilizing these loan programs can free up money for months when repairs may be needed or for months when these properties sit vacant with no tenants. Discuss all of your financing options with a mortgage consultant when considering buying a 2nd home or a rental property.

The first step for obtaining a second home is to speak with your mortgage broker and discuss financing options and determine the amount of money you can affords to spend. Be sure to remember the added maintenance costs of a second home, a lot of routine work needs to be done to maintain it and keep it in enjoyable condition. This may be work that you may not be able to do yourself do to distance or time limitations.

If the property that you are buying is for the purpose of a legitimate vacation or second home, many lenders offer loan terms that are comparable to those offered on a primary residence. To qualify, the lender will need to be comfortable that the property is being used as a second home, not as investment (rental) property.

Lenders offer more favorable terms on second homes than investment properties. Underwriters will want to know for sure if the home is being used as a second home or as an investment property. Most people purchase second homes in resort areas for vacation purposes or near relatives and family members.

Lending banks post more stringent underwriting requirements for second homes and vacation homes, because if the homeowner should suffer a financial crisis, he would almost always first default on the vacation home and try to save the primary residence. In addition to ensuring that the homeowner is able to afford payments for both the primary and the second home, most banks also require higher down payment for the second residence.


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