How to find and finance a vacation home

Every year, millions of Americans take time off to explore and enjoy the company of loved ones away from home. Whether a weekend exploring a new area or a revisiting your favorite foreign beach, vacations provide a much-needed break from the bustle of everyday life.

You might rent a property from a family friend or have a favorite hotel in the area. But what if you had the keys to a second home in your beloved destination?

Owning a vacation home is a dream for many, but a reality for few. Yet it could be more attainable than you think.

Why you might want to buy a vacation home

If you find yourself returning to the same spot year after year, you may want to save the time of searching and settling into a new rental. A second home can help cut down on planning and expenses, providing an accessible, comfortable vacation at the ready.

When done right, vacation homes can be a successful long-term investment, especially if interest rates are 4% or lower. At those rates, many real estate agents will tell you it’s a good time to buy.

If your second home is near a sought-after tourist destination, it could open up a stream of passive income during the times when you’re not using it. With the help of Airbnb and similar sites, you simply list your property and pay a fee when a member reserves your home.

How to find a vacation home to buy

Finding a vacation home to buy is almost as exciting as the trip itself, and it’s not too different from buying your first home.

Before browsing for properties, first determine what you’re looking for. The rise of the Internet means that you’re likely to find a place that suits your needs.

Here are a few questions to ask yourself — or your realtor — when narrow down your options.

Which location should I choose?

Like any major real estate decision, location is important. Even if you’ve set your sites on that castillo in España, do your research locally as well.

Generally, the farther away from your primary home, the more difficult sealing the deal can be.

International or domestic

The idea of buying a vacation home is one that many people dream of, but there’s a reason it doesn’t happen often: Buying a vacation home can get expensive quickly.

Because it’s easier to search for and visit local properties, buying a vacation house in your home country can be more straightforward than shopping abroad. Still, in some countries, it might just be more affordable than your own: Whereas $500,000 can get you a beautiful waterfront condo in downtown Miami, less than half that could land you a private Balinese villa.

In your own country or outside it, you may want to start by searching for the city or area you’re interested in along with “real estate listings” or “homes for sale.” That way, you’ll have an idea of the prices you face.

When it comes to financing, a mortgage can help offset the expense. But most American lenders don’t issue mortgages for foreign homes. That means you could be on the hook for the full price unless you take out a high-interest personal loan.

If you decide to stay stateside, plenty of banks, credit unions and other lenders offer mortgages designed for the purchase of second homes.

In your own or another state

Even if you stay within the US, you might be interested in investing out of your home state. When the property is far from where you live, you may need to rely on a real estate agent to guide you toward properties and provide photos until you can see them on your own.

Here again, the Internet is a solid tool to learn more about how the locals live, the taxes and laws that might differ from your own state and other considerations that may not be on your radar.

Urban or rural

It’s no secret that property prices vary wildly depending on where you want to live. For instance, $750,000 might get you a small studio in Brooklyn, but less than half that could land you a 2,000-square-foot home and acreage closer to New York State’s capital.

A condo in the heart of downtown, a cozy cottage on a quiet lake or a beachfront home — knowing the type of property you’re interested in will help refine your search and adjust your budget accordingly.

Purpose of the home

After you’ve narrowed down a location and property type, consider how you’ll use it. You might be looking to get away a few times a month. Or maybe you don’t plan to use it at all, instead preferring a passive income stream.

Investment

Housing prices are on the incline, with many areas in the US and abroad abundant with properties that are still affordable enough for long-term investment. Another plus: You can enjoy your vacation home as your property appreciates in value.

Yet, it’s not unheard of for vacation homeowners to rent out their second homes year-round. Doing so can help cover the cost of the mortgage or even provide a steady income stream with little effort, especially if you hire a management company to handle your tenants.

Recreation

Vacation homes are a private space for you to make your own, making for more enjoyable time away with your loved ones without the hassle of planning or adjusting to an unfamiliar living space.

If you travel often to a resort location, it might more affordable to buy your own place and rent it out in the offseason.

Pros and cons of investing in a vacation home

Best countries and states for vacation homes

Your dream vacation home is waiting for you — though you might have to be willing to scour the globe for it. Search for your new relaxation hotspot in a wide variety of locations, styles, sizes and prices. From cozy chalets on the snow-covered slopes of Canada’s Whistler Blackcomb to private villas on the sandy shores of Portugal, the choice is yours.

Finding the right spot to buy a vacation home depends on what you’re looking for. If it’s convenience you’re after, the diverse terrain of the US presents many desirable options, but your dollar goes much further if you’re willing to make the trip abroad.

Choosing a location for your new vacation home can be tough. Here are top locations for buying a second home, according to other homeowners.

Building vs. buying a vacation home

Even after your research and discussions with real estate agents, it’s possible that you might not find a vacation home that’s right for you. Despite a neverending assortment of vacation home listings, sometimes the best way to get what you want is to build it yourself.

Building your own vacation home can offer more flexibility than purchasing an existing property. You’ll have the freedom to choose exactly where to put it and design the layout that makes it uniquely yours.

A major mistake people make when building a home, however, is underestimating the costs that come with land, architects or design firms, building materials, permits and more.

Collect realistic estimates before deciding whether to buy or build. To make sure that you pick up an adequate construction loan, add in money to cover the inevitable unexpected costs that arise along the way.

Many online lenders offer construction loans, including:

• LendingTree. Offers a handful of loan programs that can help you finance the cost of a new vacation home.
• LoanDepot Mortgage. A fairly new lender, but home to resources and experts that can help you finance the construction of your second home.
• Rocket Mortgage by Quicken Loans. Backed by the well-established Quicken Loans, its experts can help you get the financing you need.

How to finance a new vacation home

Vacation homes are no small purchase, even if you plan to avoid the popular destinations. Paying for your purchase out of pocket may not be an option.

If your new vacation home is in another country, you’re barred from most US-based mortgage products. Which means you’ll need to look into alternative funding, like high-interest personal loans.

If your second home is in the US, most major lenders are eager to provide financing. But you’ll need to decide whether the property is a true second home or an investment. Lenders consider investment properties riskier than second homes, and they may impose specific parameters that decide for you whether your property is one or the other — for instance, considering your second home an investment if it’s 200 miles or more away from your primary residence.

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How to protect your vacation home

No matter how big or where it’s located, a vacation home is an investment that you’ll want to protect.

Here are a few ways you to ensure that you can enjoy your new property for years to come:

• Plan for emergencies. Is the area prone to hurricanes, earthquakes or other natural disasters? Knowing potential risks can help you put together a plan for emergency situations and stock on necessary supplies.
• Keep your home secure. You may not need a state-of-the-art security system, depending on the location and circumstances. But look into monitored systems that can let you know about break-ins or emergencies from afar.
• Get adequate insurance. Start with your primary home’s policy, which might allow you to extend coverage to a second home. Look into whether flood insurance is required. If you’ll rent out your home seasonally, consider rent loss insurance to bridge any gaps.
• Encourage renters insurance. Whether a suggestion or requirement in your rental agreement, asking your tenants to pick up their own insurance can increase protection and peace of mind beyond your standard property insurance.
• Get to know your neighbors. It never hurts to become friendly with others in your neighborhood. They can help be your eyes and ears for suspicious behavior when you’re away.
• Install smoke and CO alarms. Smoke and carbon monoxide detectors are an essential purchase for any home, especially one that might be vacant for months at a time. Test them periodically to make sure they’re in working order.

Bottom line

There’s a big difference between thinking about purchasing a vacation home and setting on the road to finding and financing one. But buying a vacation home can be easier than you might think, especially if you’re able to take out a mortgage to cover the purchase.

Start by narrowing down areas you’re interested in — domestic or international, rural or urban. Then contact a real estate agent that specializes in that location to find properties that match your needs. With information in hand, you can look at financing to cover both upfront and continuing costs.

Frequently asked questions

• How much of a down payment do I need for a mortgage?

  Second home mortgages often require a minimum 10% down payment, 5% of which must come out of the buyer’s own account.

  For low down payments, you’re likely required to pay for private mortgage insurance (PMI) until equity reaches at least 20% of your home’s value.

• Can I get a mortgage for a foreign property?

  Not likely. US mortgage lenders typically don’t approve loans for foreign property.

  If you’re looking to finance a home in another country, you might want to start with an international bank like HSBC. Or explore whether refinancing your current home or mortgage can provide the money you need. If the cost isn’t too onerous, a personal loan might cover at least a portion of what you’re looking to buy.