Financing a vacation home gets easier

New options bring second home within reach for more buyers.

By Bob Tedeschi
NEW YORK TIMES
Sunday, October 08, 2006

The American dream used to include owning a house. Now, it's owning two.

Vacation homes, once the sole province of the upper classes, increasingly are becoming standard fare for mainstream Americans.

According to a study earlier this year by the National Association of Realtors, there are nearly 7 million vacation homes in the United States, compared with roughly 75 million owner-occupied houses — a significant jump from decades past, the association said.

Much of that surge is from investors who have pinned their hopes on a rising real-estate market. But in recent years lenders have also made it easier to finance vacation homes.

"In most situations, the interest rate on a second home is the same as a primary residence," said Doug Perry, a senior vice president at Countrywide Home Loans, one of the nation's biggest lenders. "And you can get a loan with 5 percent down. That's a change from five, 10 years ago."

Perry said that lenders once evaluated loans on second homes in a manner similar to rental properties, which tend to carry more risk and therefore higher interest rates and down-payment requirements.

"It's an acknowledgment that people have more second homes now," he said.

According to the real-estate group, of the owners who have bought vacation homes since 2003, 23 percent used the proceeds from other real-estate sales to finance their purchases, and 19 percent used equity or sales proceeds from their primary residences.

Those who are considering taking equity out of their primary homes to buy vacation homes should consider refinancing their existing mortgages and taking cash out to provide the down payment on the second home, instead of taking a second mortgage or a home-equity line on the primary residence, said Don Romano, the president of the Shelter Rock Mortgage Corp. in Lake Success, N.Y.

"Second mortgages carry a higher interest rate than a first mortgage, and credit lines leave you exposed to interest-rate changes," Romano said.

Aside from the obvious psychological benefits of owning a getaway home, vacation properties offer tax advantages as well. Mortgage interest is tax-deductible as long as the borrower's total mortgage liability does not exceed $1 million. If so, the interest on the first $1 million is still tax-deductible.

There are caveats. For instance, the more often a vacation home is rented, the less mortgage interest can be deducted, said Tom Ochsenschlager, a vice president of the American Institute of Certified Public Accountants. But if the owner rents the house for 14 days or fewer, there is typically no penalty.

When a vacation house is bought by several people — two couples, perhaps — tax deductions are simply split in line with the ownership shares, he added.

But too often couples or disparate family members do not weigh the factors that can complicate multiparty vacation home ownership, said Romano of Shelter Rock.

Romano said that he discusses how one person's financial situation could affect his or her ability to carry the costs of the venture and how it could raise the borrowing cost for the whole group.

"If there are any rough spots, having that discussion focuses light on them, and they either address things, or they don't go through with it," he said. "People don't want to jeopardize their personal relationships because of this."