Vacation home Archives

December 23, 2022December 23, 2022

Homeowners Shell Out for Flood and Tornado Protection

Flood. Tornado. Wildfire. As a homeowner, none of these are words you want to hear. While home construction in areas prone to natural disasters has advanced in the past several decades to provide better protection, properties in these regions still come with significant risks. However, Americans are continuing to purchase and move to vacation homes in places like Cape Coral, North Port, and Tampa, Florida — likely due to the reasonable cost of living, low property taxes, and proximity to both water and outdoor attractions.

It’s likely that many of these buyers simply aren’t aware of the potential issues that come along with buying a home in these areas.

“…House hunters should be aware that purchasing in a disaster-prone area not only puts them and their home at risk, but their finances as well. Home values in climate-endangered places may fall in the coming years as consumers learn more about the risks to properties in these areas,” says Redfin Senior Economist Sheharyar Bokhari. In fact, nearly all second homes bought within the past two years (94%) are at high heat risk, while more than three quarters (78%) have high storm risk.

According to the results of an August 2022 Redfin survey, current homeowners in these locales are quite aware of and proactive about the threats: 71% of Florida homeowners have spent money to protect homes from climate risk, and more than half of all homeowners (58%) have. More than a third (33%) of all homeowners have also put more than $5,000 into climate-related house projects. The majority (26%) of improvements were to mitigate extreme heat, while 22% invested in steps to help minimize extreme cold, 16% took measures to prevent flooding, and 14% focused on guarding against hurricanes and other tropical storms. Among Florida homeowners, this percentage was nearly triple the national figure, at 40%. Overall, hurricane and major storm coverage actually saw the biggest increase among all homeowners since February 2021, growing from 19% to 29%.

Here are the most common types of disaster-specific coverage and how costs vary across the U.S.

Flood Insurance

Redfin’s survey found that 36% of homeowners have flood insurance, which comprises the highest portion of respondents. However, many of those with flood coverage are still underinsured overall; just 18.5% of homes located in the areas required to evacuate due to Hurricane Ian had coverage through FEMA’s National Flood Insurance program.

While the price of flood insurance is dependent on your location, the national average cost through the National Flood Insurance Program (NFIS) is $771 per year. States with the most expensive flood insurance include Vermont ($1,652/year), Connecticut ($1,504/year), Rhode Island ($1,458/year), Pennsylvania ($1,407/year), and West Virginia ($1,355/year).

Tornado Insurance

Standard homeowners insurance usually covers hail and wind damage, but not high winds or tornadoes specifically. If you live in an area that is at high risk, like the states that are part of “Tornado Alley” (generally Texas, Oklahoma, Kansas, Nebraska, Iowa, and parts of Louisiana and Colorado), you’ll want to consider purchasing windstorm insurance as part of your standard policy.

The cost of a windstorm insurance add-on depends on your particular geographic region, and has a deductible that’s a percentage of the total dwelling coverage amount, which usually ranges between one and five percent. However, in coastal areas, it can be up to ten percent. Alternatively, the deductible may be a fixed amount from around $500 to $5,000.
States with the highest premiums by windstorm deductible amount are Oklahoma, Kansas, Nebraska, and Colorado.

Fire Insurance

Most standard homeowners insurance policies have some level of coverage for fire and smoke damage, and the average cost of a policy that includes fire coverage is $1,899 per year. However, individuals in regions that are at higher risk of wildfires, like California, can pay much more than that — especially since many companies won’t provide sufficient coverage for damage in these areas. The percentage of homeowners who purchased wildfire coverage grew from 15% to 24% in the past 18 months, and homeowners insurance costs increased 10% in California alone.

It’s also important to note that there are a few different types of fire insurance: dwelling coverage, which pays to rebuild or replace the actual structure of the home, other structures coverage, which refers to buildings on the property like a shed or garage, and personal property coverage, which pays for one’s belongings inside the home like clothing and appliances. Those in fire-prone areas might want to consider purchasing an additional dwelling fire policy, which costs an average of $651 per year.

If you’re a homeowner who lives in or is planning to move to a region that’s at high risk for natural disasters and could use some extra cash to fund improvements that can help guard against potential damage to your property, take our five-minute quiz to see if a Hometap Investment might be a good fit for you.

YOU SHOULD KNOW…
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

September 16, 2022

5 Ways to Fund Your Vacation Home Down Payment

Long gone are the days when having a second home was an impossible dream. In recent months, especially in the wake of COVID-19, purchasing another property is more appealing — and more popular — than ever. In fact, a recent Redfin report found that demand for vacation homes surged 87% from pre-pandemic levels to January of 2022, and according to a Bloomberg survey, more than 33% of respondents said that they were more likely to buy a second home as a result of the pandemic. Beyond having a reliable vacation home to escape to every year, buying a second property has additional benefits — and there are a number of ways you can use the equity in your primary home to fund a down payment.

Advantages of a Vacation Home

Investing in real estate can be a great way to diversify your portfolio; in addition to stocks, bonds, and mutual funds, owning property can help you have a more well-rounded and less volatile collection of assets. There’s also the potential for gaining long-term earnings in addition to those from your primary residence through appreciation over time.

You can enjoy tax benefits as well. If you use the second property for most of the year rather than simply renting it out, you’re able to deduct both property taxes up to $10,000 and up to $750,000 of mortgage interest on your first and second homes. In order to take advantage of these benefits, however, you’ll first want to make sure you’re eligible, since there are some stipulations if you rent out the property for even a short amount of time during the year.

Thinking ahead to retirement, if you have your heart set on a particular destination in which to spend your golden years, you may be able to secure a spot at a relatively low price and interest rate and reap the benefits of appreciation rather than waiting until you’re ready to retire to purchase a property.

And, of course, there are the priceless emotional benefits of having a place in which you can make lasting memories with your family and friends.

How to Fund Your Vacation Home Down Payment

1. Home Equity Loan

One of the most common options is a home equity loan, which usually has the advantage of a fixed interest rate, so your payments will be consistent every month. You’ll also receive the funding in a lump sum, which can be helpful in terms of getting a down payment together quickly. However, you’ll need to be prepared to foot the bill for the loan installments on top of your existing monthly mortgage payments, which can add up.

2. Home Equity Line of Credit (HELOC)

Another method is a home equity line of credit (HELOC). On the plus side, you have quite a bit of flexibility — both in terms of how much money you can access and how often you can access it. However, the variable interest rates attached to HELOCs can mean that monthly payments can fluctuate significantly from month to month. You’ll also want to keep an eye on your credit score, since the lender can freeze your HELOC if it drops too low.

3. Cash-out Refinance

A cash-out refinance lets you access your equity through a new mortgage on your home that has a balance larger than your current one, giving you the difference in cash to pocket and put toward your expenses. However, keep in mind that you’ll have to pay the same fees on this mortgage as the original one, including those for closing costs and potentially an appraisal.

4. Home Equity Investment

Finally, a home equity investment provides you with cash in exchange for a share of your home’s future value. There aren’t any interest or monthly payments to worry about, nor any restrictions on how you use the funds — so you can use the cash toward a down payment on a second home, or even to pay off debt in order to get your finances into better shape before buying another property. With a Hometap Investment, you have 10 years to settle with savings, a refinance, or through the sale of your home.

5. Alternative Sources

Beyond your equity, you can also use savings, investment sources (IRAs, 401(k)s), additional income streams from a side hustle — or a combination of these — to pull together the money for a down payment.

If you’re a homeowner who is seeking funding for a second home or investment property, take our five-minute quiz to find out if a Hometap Investment might be a good fit to get the money you need.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

June 1, 2021June 23, 2022

Should You Sell Your Home or Tap Into Your Home Equity?

Today’s real estate market has a lot of homeowners debating whether they should cash in on their home’s appreciation by selling their home or accessing their home equity. There are several factors to consider that can help you make the decision that’s right for you. Below, explore the advantages and disadvantages of each option, as well as the most common ways to access your equity so you can answer the question Should I sell my home? with confidence.

Selling: Pros and Cons

While the idea of downsizing to a smaller home or conversely, finding a house with more space to spread out may seem appealing in theory, the current market can make it a whole lot tougher in reality.

At the moment, the real estate market is red-hot, with a median sale price of $370,528 — an increase of more than 22% year-over-year from April 2020. More than 600,000 homes sold in the U.S. in April, a jump of 38.2% from the previous year. Mortgage rates have also dropped 0.2 points, making it more tempting than ever for prospective (and stir-crazy) buyers to lock in an offer on a new house.

Given the competitive nature of real estate, not only are houses selling for hundreds of thousands of dollars over asking price. But more and more, sellers are adding contingencies that allow them to stay in their home until they find a new property.

Often, short-term financing solutions like bridge loans can allow buyers to forego the contingencies and move more quickly, which can be a huge plus in a hot market. But it comes with risks, too. Some contingencies include forgoing home inspections, which may end in buyers’ remorse for those urgent to move into a new home.

There’s also the costs of moving to consider. If you plan on hiring movers, the average price tag is more than $1,000, depending on how much you’re taking with you. And of course, that’s not taking into account the hassle and emotional toil of the whole process.

In short, those looking to downsize or move to a location with a less competitive market have a great opportunity to cash in on a hot market, but it’s important to have a strong handle on your numbers and your moving plan.

Tapping into Your Equity: Pros and Cons

Moving isn’t the only way to make the most of your home’s growing value. You might be able to transform your current home into your dream home by tapping into your hard-earned equity to make the renovations you’ve been putting off — or build a long-desired addition.

If you decide that you want a seasonal getaway, you can also use your equity to put a down payment on a vacation home. There are a handful of different ways to get equity out of your home. Let’s explore the most common ones.

Home equity loan

One of the most common ways homeowners tap into their equity is through a home equity loan, as its fixed rate and lump sum payment often makes sense for funding home improvement projects. However, the qualification and approval process can present hurdles, as most lenders require a firm minimum credit score and stringent criteria.

HELOC

You can also open a home equity line of credit (HELOC) to access your home equity. This option offers flexibility in terms of the amount of money and how often you can borrow, but also comes with a level of unpredictability due to rate variability. It can also be risky because your lender can freeze your HELOC if your credit score or home value decreases.

Cash-out refinance

A cash-out refinance is another popular option for tapping into your equity. If you go this route, you have the chance not only to cover the cost of your renovation, but also to secure a lower interest rate on your mortgage. However, since you’re essentially paying off your mortgage with your current one, your timeline will be extended and you’ll have to pay application, closing, origination, and possibly even appraisal fees.

Learn more about when a cash-out refinance makes financial sense >>

Home equity investment

With a home equity investment, you can get a portion of your equity in cash in exchange for a percentage of your home’s future value — usually within a few weeks. You don’t have to deal with any monthly payments or interest, and can use the funds for whatever you’d like. This solution allows you to stay in your home and bypass the challenges and extra costs associated with moving.

Ultimately, Should I sell my home or tap into my equity? is a question only you can answer based on your own financial and personal situation.

Take our five-minute quiz to see if a Hometap Investment might be a good fit for accessing your equity without having to sell your home.

YOU SHOULD KNOW…

December 18, 2020March 22, 2023

As Michigan Home Prices Grow, So Do Affordability Concerns

Michigan truly has something for everyone. With more than 100 state parks and recreation areas, 11,000 inland lakes, and 13,000 miles of hiking trails, it’s an ideal place for nature lovers.

The state is also home to Michigan State University and the University of Michigan, drawing students and college sports fans alike. Both GM and Ford are headquartered here, and other popular industries include military, aerospace, and mining. Plus, Michigan residents get to enjoy the beauty of all four seasons, from the summer heat and fall foliage to the winter snowfall. But homeownership here also comes with its own unique set of challenges.

Housing prices in the state rose six percent between June 2019 and June 2020, from $181,235 to $192,104. And in Metro Detroit, which has undergone a commercial and cultural renaissance in recent years, the contrast was especially stark. In March, as coronavirus lockdowns began, the city experienced a 61.8% decrease in home listings, more than any other city in the U.S. However, pent-up demand after restrictions were loosened led to a huge surge in sales: a massive 114% increase from May to June of 2020, and up nearly 15% from the same time in 2019. The median home price in Wayne County, where Detroit’s located, also saw the biggest year-over-year jump of any county, rising 11% to $160,000.

High Demand, Low Supply

Western Michigan has experienced slow but steady growth since the 2008 recession. Homes in Grand Rapids are now 90% more expensive than they were back then, and the average home price in Kent County as a whole is around $262,000. And in southwest Michigan, the market has been on fire. September of 2020 saw 518 closings, a number not seen since January of 2005. What’s more, sales were up 49% from last September, and the average price was $316,525 compared to $241,620—a 31% increase.

In the northern part of the state, a popular region for vacation homes, both purchases and sales have grown nearly 10% in the past year, at least partially as a result of the pandemic. The median home price is much higher here than elsewhere as well: $428,581 in Northwestern Michigan as of August 2020.

“I think we offer a really great environment here in terms of feeling like you’re a little more spaced out than you are in a city,” Chrissy Ingersoll, a real estate agent with RE/MAX Bayshore, explained to C&G Newspapers. Many Michigan residents are following the national trend of more space, more peace and quiet, and fewer people, according to local real estate agents.

“People are thinking, ‘Hey, if we can buy a place and work from home with our phone and computer, what the heck. It‘s a better lifestyle up here and we can worry less,’ ” agent Pat O’Brien told the Detroit Free Press.

Read, “Should You Use Your Home Equity to Buy a Second Home?“

However, as a result of this high demand, the area is experiencing issues with low inventory and lengthy delays with construction projects. Currently, the bookings in these vacation areas go as far as two years out, and many builders aren’t even accepting any more requests for new projects at the moment.

Shifting Financial Priorities

That’s not the only challenge. The COVID-19 pandemic has affected the Michigan job market significantly, with economists predicting two more years of increased unemployment. In turn, this raises concerns about the ability of out-of-work homeowners to keep up with their mortgage payments and mounting day-to-day expenses.

At the same time, for those staying put in their homes, there’s a desire to complete improvement projects.

“The money they might spend on a trip to Europe is being used for remodeling the kitchen, bathroom, or living room,” Janet Chambers, Executive Officer of Home Builders Association of Northern Michigan, told the Manistee News Advocate.

Are you a current Michigan homeowner who’s hoping to access your home’s equity to pay off debt, fund renovations, or cover educational expenses? If so, Hometap may be a good solution, as it allows you to receive up to $400,000 in interest-free cash without the hassle of a loan or monthly payments.

DISCLAIMER

June 25, 2019June 22, 2022

2019 Hot Spots: Where to Invest in a Second Property

As Forbes recently pointed out, interest rates are likely to rise in the coming months. If you’ve been considering a second property, whether as a vacation home, rental property, or both, the time to invest is now.

Second (or third or fourth) properties offer significant income-generating opportunities with short-term rentals only gaining in popularity. Airbnb, just one of the short-term rental platforms, earned $2.7 billion since 2008. There’s also opportunity with long-term rentals in areas that are perhaps less enticing for vacation rentals but have, for example, a significant student population.

But while interest rates are likely to rise, not all property values are set to rise. Here are five areas where we think homeowners have the greatest chance of seeing a return on their investment.

Orlando, FL

Real Wealth Network has noticed an increased demand for single-family homes in Florida with Orlando, in particular, seeing an increase in its population from a mix of job seekers, retirees, and students. The area’s warmer temperatures, beaches, and no state income tax are sure to continue being a lure to diverse groups. In fact, over the last seven years, the area’s population has grown 227% faster than the national average.

Low housing prices (you can find many homes under $200,000), property taxes, and insurance allow you to claim a stake in the market today while increasing rental rates promise continued opportunity.

Raleigh, NC

WalletHub named Raleigh #3 on its list of best state capitals based on its high affordability, economic well-being, and quality of education. The area benefits from several factors, not the least of which is being part of the Research Triangle along with Durham and Chapel Hill. The area is home to some 200 companies, including high-tech startups, information technology, and biotechnology, helping it rank high on Glassdoor’s 25 best cities for jobs list. It’s also projected to be the fastest-growing metropolitan area over the next five years.

Home prices are expected to continue rising, so the time to purchase is sooner rather than later. For those looking to rent, the area universities of Duke, University of North Carolina at Chapel Hill, as well as several other private colleges provide a steady stream of students.

New York, NY

Purchasing real estate in one of the world’s busiest cities may not seem affordable at first, but the opportunity for gain is so great that it’s still worth considering if you’re looking for a lucrative investment. The median property price is just over $1.1 million, but rental income amounts to more than $3,000. Boroughs like Queens may prove to be just as attractive as Manhattan or Brooklyn.

The Association of Foreign Investors in Real Estate named New York #2 on its list of top global cities for real estate investment. But if you’re looking to list a property as a short-term rental on sites like Airbnb, you may want to weigh the risks. The city has tried to enact laws to make it illegal to rent an apartment for less than 30 days, creating an ongoing legal battle.

Sacramento, CA

The one West Coast city on our list, California’s capital is poised for both population and job growth. The average home price of $389,117 may seem high, but it’s less than half of that of Los Angeles (which is more than $900,000). Plus, increased job growth comes new renters and DoughRoller reports that home prices are expected to increase 33% over the next three years.

WalletHub lists Sacramento in the middle of its best state capitals list, but what it lacks in affordability, it makes up for in quality of life. Just over an hour from the Bay Area, Sacramento is becoming more attractive to those who want the proximity to the coast with more affordability.

Jacksonville, FL

Some of the best places to invest are beach towns, particularly for those looking to rent out the property via short-term vacation rentals. While Jacksonville offers beaches in droves, it also has a rotating market of renters thanks to the area’s 34,000 military-affiliated personnel. As HomeUnion reports, Mayport Naval Station is set to bring eight new ships in the coming years, potentially increasing the number of personnel looking for housing.

The city has one of the country’s fastest-growing populations due in part to both the naval station and other area businesses like Anheuser-Busch and Vistakon. Forbes even included the city on its best places for business and careers list. And, as noted with Orlando, there are no state income taxes.

No matter if one of these places piques your investment interests or if you have your sights set on another destination for a second property, Hometap can help. As a homeowner, you can tap into the equity you’ve built in your home in exchange for a share of the future value of your home. In fact, purchasing a second home is one of the top three reasons homeowners apply for a Hometap Investment. Many use the investment to put a down payment on a second property. Learn more about using Hometap to fund a second property.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

April 28, 2019June 23, 2022

1 Question to Answer Before Financing Your Second Home

With your first property, you navigated the ins and outs of securing a mortgage, so purchasing a second home should be easier, right? Believe it or not, how you intend to use your home—whether as a vacation house or investment property—directly impacts your financing options. Read on to understand how loans differ and what you need to know before buying your second home.

Define Your Second Home

Banks make a distinction between a house on a lake where you plan to vacation and a house you plan to rent out to generate revenue. Their definitions come down to how you plan to use the property.

Vacation Home: A vacation home is somewhere you intend to live in for part of a year in addition to your primary residence. As Nolo points out, timeshares and rentals don’t qualify as vacation homes. If you plan to list your property on Airbnb in the present or future, be sure to check with your lender first as mortgage rules may preclude short-term rentals of any kind.

Investment Property: An investment property, by contrast, is neither a place you live in nor a primary residence. Instead, its intended use is to make money for the buyer through rentals, appreciation, or via tax benefits. The common types of investment properties are residential or commercial rentals or flippers where the goal is to resell the real estate for profit.

Fund your Second Home

Once you’ve defined how you’ll use your second home, you can determine which financing options you qualify for and which one makes the most sense for you. Remember: Deceiving a lender about intended use is occupancy fraud and could send you to court.

Second Home Mortgage

If you want that beach house, mountain cottage, or other vacation property and can afford the associated costs, a second home mortgage may be your best bet. Mortgage underwriters will only look at expenses for principal, interest, taxes, insurance, and homeowners association (HOA), if applicable. If these check out, your loan is approved.

As a homeowner, however, you’re already familiar with the costs and have gotten a taste of the hidden expenses of home maintenance. With a second home, you’ll also want to factor in a budget for additional expenses, such as travel to and from your second home, utilities, furnishings, cookware, and linens.

Investment Property Mortgage

You see the incredible potential of an income-producing property, whether via renting or flipping. In addition to a sizeable down payment, banks require a strong credit score to lock in a fixed rate. However, know that your lender may check in to verify who exactly is occupying your property either in-person or online.

Home Equity Loans

Using the equity you’ve built in your first home to fund your second means taking less cash from your pocket. Home equity loans can offer lower interest rates compared to a new mortgage.

However, as with your first mortgage, home equity loans require timely payments. Missing a bill puts both your primary and secondary homes at risk. In addition, be sure to understand what kind of rate you’ve signed up for. An adjustable rate is exactly what it sounds like: moveable. You may be paying more than you bargained—or budgeted—for at any given time.

Hometap Investment

Unlike a loan, a Hometap Investment has no monthly payments, interest, or restrictions on how you use those funds—whether it’s a vacation home or investment property. Essentially, you’re taking on another investor in your home’s appreciation rather than borrowing on what you’ve built with the obligation of paying it back.

By using your home’s equity to fund other investments, such as buying another property, you’re diversifying your wealth. Real estate offers an attractive diversification of your portfolio of stocks, mutual funds, and bonds, and a second home ensures you’re not keeping all your wealth in one basket, i.e., your first home.

Is a Second Home in Your Sights?

Buying your first home may have seemed scary but you did it. Along the way, you’ve lived the highs and lows of homeownership arming you with the experience needed to add a second property. Take a close look at your total financial picture and weigh your financing options before you leap. With the right preparation, your second home can help you achieve vacation bliss or financial returns.

Take our 5-minute quiz to see if a home equity investment could be your solution for funding your second home.

YOU SHOULD KNOW…

October 9, 2018February 5, 2023

Should You Use Your Home Equity to Buy a Second Home?

A sweet little seaside cottage just went on the market and you’re now daydreaming of a weekend home. You found a fixer-upper with great potential—you could buy it and flip it. Or you’d like a new income stream as a rental property owner, and a perfect bungalow down the street was recently listed.

In any of these scenarios, since you’re not planning to leave your current home, the proceeds from its sale aren’t an option for a down payment—but that may not necessarily be a deterrent. In many cases, taking on a second property can still align with both your personal and financial goals.

To make purchasing your second home a reality, it all depends on how you finance it. And in these types of cases, many homeowners consider using their current home’s equity to buy a second property. The market is certainly favorable: In 2017, according to CNBC, homeowners with a mortgage (representing approximately 63% of all properties) saw their home equity go up by 12% at an average of $15,000 per homeowner and more than $900 billion collectively. That extra value could be tapped to go toward another down payment.

Should you use your home equity to buy a second home? Here are a few things to consider.

How Much of Your Home Equity Would You Need to Tap?

Regardless of whether you own your home outright or currently have a mortgage, you’ll want to figure out the exact amount you’ll need to take on a second property. Many homeowners will seek to borrow only enough funds to cover the down payment for the second home. But if you’re considering a fixer-upper, it may make sense to take out an amount sufficient to cover not only the down payment but also anticipated repairs and renovations.

What’s Your Risk Tolerance?

Knowing how much risk you’re comfortable taking on is key when using your current home equity to buy a second home. If your second home will be an income property (either short- or long-term rentals), do you have enough cash on hand to cover expenses during lean times of year or periods when the property is vacant? If something breaks or unforeseen damage occurs to either your primary residence or second property, do you have enough money to cover these unexpected repairs? Finally, if a financial hardship were to strike (e.g., a medical emergency or job loss), could you potentially be on the hook for foreclosure on either or both of your properties?

What Will Your Debt-to-Income Ratio Be?

Again, knowledge is power. Consult a mortgage calculator and compare your home equity lending options to know exactly what your monthly payments will be once you’ve taken on a second home. Read all fine print thoroughly and consult with your potential lenders to ensure you’re getting the most advantageous financing plan for your goals (and no hidden surprises, like fees, down the line). In addition to your monthly payments, factor in any tax implications (both obligations and benefits) that may result from purchasing a second home. If you’re not sure how your taxes will be impacted, speak to your accountant or other trusted tax professional.

Ultimately, your current finances and the specifics of your potential second property will play an equal part in determining whether becoming a homeowner twice over is feasible (and worth your while). By making clear-eyed calculations and having honest conversations with your potential lending partners, you can decide whether it makes good financial sense to take on another property.

Ways to Use Your Equity to Fund a Second Property

Home Equity Loan

A home equity loan gives you a lump sum of cash that you can use for a down payment on another property, and the fixed interest rate means you’ll pay the same amount every month.

Cash-out Refinance

With a cash-out refinance, you take out another mortgage on top of your current one, and can often lock in a lower interest rate by doing so. However, since it is a brand new mortgage, a refinance comes with fees and closing costs — and may extend your payoff timeline.

Home Equity Line of Credit (HELOC)

A home equity line of credit lets you pull funds as needed, so it can be more flexible than other options. But with that flexibility comes unpredictability as well, since the variable interest rate can change every month.
Home Equity Investment

Finally, a home equity investment allows you to tap into your equity in the form of a lump sum of cash in exchange for a percentage of your home’s future value.

Frequently Asked Questions About Using Your Equity to Buy a Second Home

Is it smart to use a HELOC for investment property?

While the best financing option depends on your own situation and goals, a home equity line of credit can provide flexibility in terms of both the amount of funding you can access and the frequency with which you can access it. However, it might not be an ideal fit if you’re looking for predictable monthly payments, as the interest rates are variable.

How do you use your equity on a paid off home to buy a rental property?

There are more than a few different ways to tap into your equity to purchase a rental property, including a home equity loan, home equity line of credit, cash-out refinance, or home equity investment. All of the options have pros and cons, so it’s a good idea to weigh your options.

Can I use the equity in my house as collateral for a loan?

Yes — with a home equity loan you’re technically using your home as collateral, as the financing is being secured with its value.

Can you use money from a home equity loan for anything?

Typically, yes. You receive a percentage of your home equity in the form of a lump sum, so it can be helpful if you’re hoping to use the money for a down payment on a second property.

See if you prequalify for a Hometap investment in less than 30 seconds.

YOU SHOULD KNOW…

July 16, 2018May 19, 2022

3 Questions to Ask before Investing in a Vacation Home

A weekend home on the lake. A pied-à-terre in your favorite city. A beachfront condo. For some homeowners, a vacation home or weekend home can hold both aspirational and practical appeal.

According to the National Association of REALTORS® (NAR), three primary motivations drive Americans to purchase a vacation home: as a family retreat, as a principal residence at some point in the future (e.g., retirement), or as an investment (e.g., as rental income or to diversify investments).

“We bought our cabin 15 years ago,” says Rick S., a full-time Connecticut resident who has a vacation home in Vermont. “It’s a place for quiet solitude in the woods, a place for us to get away and unwind. We go up at least two weekends a month. I’s really exceeded our expectations.”

Of course, taking on a second home is a major commitment, and the considerations will be unique based on property type, geographic location, whether you’ll be renting it, etc. But for any aspiring vacation homeowner, some financial research (and some soul searching) can help clarify your decision, regardless of the particulars. If you and your family have been thinking about buying a vacation home, here are three key questions to ask before calling a real estate agent.

1. Why Do You Want This Vacation Home?

First things first: What’s the primary motivator driving your decision for a vacation home? Relaxation and leisure? Income and investment? Some combination? Before you start your property search, have the key uses in mind, so you can optimize the time spent touring potential homes to buy that best meet your needs. If you anticipate hosting family reunions or renting to groups, a larger property may make sense. If you expect to have the home merely as a place to sleep while you explore the surrounding region, a smaller condo could be a good fit.

Rick S. and his family had a specific list of “must-haves” when considering vacation home properties. “It had to be less than a two-hour drive [from our primary home] so we could leave on a Friday and have the whole weekend,” he said. “It needed to be pretty isolated, away from neighbors. Near a body of water—a lake or pond—was ideal. And it had to be a log cabin.”

In addition to determining the preferred characteristics of the property itself, be realistic in considering how you and others will use the home as well as the frequency of your visits as you start to narrow down properties.

2. Is Now a Good Time to Buy a Vacation Home?

With any major purchase, understanding current and future market trends can help inform your decision as to when to buy. According to the 2017 NAR Investment & Vacation Home Buyer’s Survey, of more than 2,000 vacation and investment home buyers, 81% of vacation home owners and 76% of investment property buyers felt now is a good time to buy.

Additionally, investment buyer survey respondents indicated they plan to own their investment home for nine years (an increase from five years from the 2015 survey respondents). Among buyers of vacation homes, 18% plan to own their home for future retirement. And like investment buyers, the median length of time vacation homeowners expected to own their property is nine years.

As you’re considering when and where to buy your vacation or investment property, speak to local real estate professionals about the specific housing market. Is now a good time to buy in that specific area? What real estate trends are anticipated in the coming years and are those trends favorable to whether you’re planning to rent the property (both short- and long-term) or sell it down the line?

3. How Will You Pay for Your Vacation Home?

Once you’ve decided on the region, the type of home, and how you’re planning to use the new property, now it’s time to tackle the finances: How are you planning to pay for your vacation home—and continue to cover the mortgage (if applicable) and upkeep?

According to NAR, the 2016 median vacation and investor home purchase price was higher than 2015: $200,000 for vacation buyers (up from $192,000), and $155,000 for investors (up from $143,500). Thirty-six percent of investors and 29% of vacation buyers paid all cash; for those who used financing, 45% of vacation buyers and 47% of investors borrowed less than 70%.

During the first few years of having the vacation home, Rick S. and his family rented out the cabin. “We used renters to help supplement paying the mortgage and were very selective about who rented it,” he said. Because the family now has the same renters who book repeatedly year after year, they don’t need to advertise to get new renters any longer, as they have enough income from existing clientele.

In determining how you’ll finance your vacation home or investment property, update your budget to reflect your current income and expenditures as well as the anticipated new costs from your vacation home’s mortgage, taxes, furnishings, and upkeep. Factor in property management costs (if applicable), potential rental income (which will fluctuate), and insurance.

If the numbers don’t quite add up or if the budget is too tight for your liking, don’t worry about taking a step back. You can always develop a savings plan to work toward your goal of a second home. You can look into alternative financing sources. You could pursue a particular type of property that may be more affordable (such as a short sale or a timeshare). The objective is to make sure your second home aligns with your initial goal, whether that’s a gathering place for family, a place to unplug and destress, or another income stream.

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LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.