How do you finance a second home?

There are a few vacation home financing options available to choose from, including Home Equity Line of Credit (HELOC), cash-out refinance on your primary home, investment property loans, and conventional loans.

Are interest rates higher for vacation homes?

Yes, they can be if you’re taking out an investment property loan. Investment loans are for homes that are intended to generate income, and interest rates on these loans are usually about a half-point higher than those on conventional loans.

Can you get an FHA loan for a vacation home?

No. Investment properties and second homes are both ineligible for government loans (including FHA, USDA, and VA loans).

How much should you put down on a vacation home?

There’s no single “right” amount to put down, and your down payment will depend on the type of loan you’re using to finance your vacation home. But in general, for investment property loans, you’ll need to put 20% down (though some lenders will allow as little as 15% down). If you’re financing with a conventional loan, you may be able to put as little as 10% down if you’re coming in with a strong credit score (usually above 680).

Vacation Home Financing Options

Vacation rental homes are spiking in popularity, and for good reason. More than half of today’s travelers would prefer to stay at a vacation rental over a hotel, according to a 2021 Vacasa consumer survey.*

Investing in a vacation home that’s also a vacation rental can create a best-of-both-worlds scenario: You can enjoy downtime in one of your favorite destinations while getting an income-generating property that helps pay for itself. Full-service vacation rental management companies like Vacasa make life even easier by managing day-to-day responsibilities, like booking your home and communicating with guests.

However financing a vacation home requires a slightly different approach than financing a primary residence (and working with a lender who specializes in second homes can be greatly beneficial). Let’s walk through a few vacation home financing options that can make your dream a practical reality.

1. Home Equity Line of Credit (HELOC)

For the average homeowner, opening a HELOC on your primary residence may be your best option for financing a vacation home.

What is a HELOC?

A HELOC is a loan based on the current equity within a home. Some homeowners are able to access up to 90% of their current home’s value when they choose to open a HELOC.

Can I use a home equity loan to buy an investment property?

Depending on the amount of equity available from your primary home, you may be able to draw on a line of credit to pay for the second home. If the dollar amount doesn’t equal the full cost of the new home, the line of credit can be used for a down payment.

Taking out a HELOC means you won’t have to refinance the mortgage on your current home. The new loan isn’t attached to, and doesn’t affect, the first mortgage in any way, but your mortgage interest rate will vary depending on the type of HELOC you choose. With lenders offering new options for HELOCs nearly every day, this type of home loan could be a successful path to buying a vacation property.

The pros and cons of using a HELOC to buy a vacation rental property >

2. Cash-out refinance for primary residence

Refinancing your primary home and cashing out on the equity might also be worth exploring.

What is a cash-out refinance?

It’s where you convert some of your home equity into cash, establishing a new mortgage for your primary residence. In some cases, you can use a conventional loan to borrow up to 80% of the value of your current home.**

Your new primary mortgage will depend on your credit score and your debt-to-income ratio, so make sure to discuss your refinancing options with a specialized lender.

If your primary home’s mortgage payment does increase significantly, you want to be sure you can afford the new second home payment, along with any additional fees, property taxes, insurance, and more on both homes.

3. Investment property loan

Typically, interest rates on investment loans are half a point higher than those on conventional loans (which we’ll cover in more detail a little later).

What is an investment property loan?

An investment property loan is for homes that are intended to be income-generating properties. A good credit score (usually above 650) is needed and will help with the overall terms of the loan. Typically, you’ll need to put 20% down, but some lenders will let you start with as little as 15% down.

A low debt-to-income (DTI)*** ratio is also important. Most lenders will require your total debt (including both primary and secondary home mortgages) to be at 45% of your monthly income or lower. Note: If you’re buying an investment property for the purpose of short-term rentals, the future rental income will most likely not count toward your gross income for that calculation.

Finally, a good rule of thumb is to have enough cash to cover two to six months of rent on both your primary and secondary residences.

4. Conventional loan

A final option to consider for financing a vacation home is a conventional loan. This is a tempting option, as conventional loans generally have lower interest rates than investment loans.

What is a conventional loan?

A conventional home loan falls under the Fannie Mae and Freddie Mac guidelines and has a fixed or variable mortgage rate with a set term. In most cases, your second home must be 50 or more miles away from your primary residence—otherwise, it will be classified as an investment property and is not eligible for financing through a conventional loan.

You can put as little as 10% down on a second home, but you will need to have a minimum credit score of 680. When considering a conventional loan, it’s worth comparing both adjustable-rate mortgages (ARMs) and fixed-rate mortgages. Zillow has reported that the default loan, the 30-year fixed-rate, doesn’t always net the best long-term return for the investor.

Planning to rent out your second home?

Talk to a specialized vacation rental lender. Many lenders will want you to take out an investment loan. Others may be comfortable with allowing a conventional loan if you’re uncertain of your long-term plans. In either case, we recommend transparency from the start.

Ready for the next steps? Try our handy guide to how to buy a vacation home. You can read up on the vacation home buying process from searching to closing, and the key steps in between.