Vacation Home Mortgages

Looking for a vacation home mortgage is different than looking for the mortgage on your first home for a number of reasons. First, you are already paying one mortgage; the second home is a luxury, not a necessity like the first, so your mortgage payment should be smaller. Second, mortgages on vacation homes will be structured differently since you likely have one existing mortgage. This difference in structure can mean everything from higher interest rates to different terms in case of default. Understanding a few basics will help with the process.

What is a Second Mortgage?

A second mortgage is an additional loan secured against the home you already have a mortgage on. If you get a mortgage on the new vacation home you are about to purchase, it is not a second mortgage. Most banks and traditional lenders do not provide second mortgages, but they may provide simultaneous new mortgage on another property. While you may use a second mortgage to finance the purchase of your vacation home, you may lose your existing home in case of default.

What’s the Difference between a Second Mortgage and a Secured Loan?

Electing not to pursue a traditional mortgage on your new vacation home presents you with the option to place other assets down as collateral. If you place your existing home down as the collateral, you are opting for a second mortgage. A secured loan is any type of loan secured against an asset, so a second mortgage is a secured loan. However, a secured loan may also be obtained by placing an automobile, business or other hard asset down as collateral. An unsecured loan is a loan without collateral, which is not recommended due to high interest rates and unfavorable terms.

How are the Interest Rates?

Though any type of secured loan will offer a better interest rate than an unsecured loan, expect slightly higher interest rate on your vacation home loan than your initial mortgage. If you have already paid off one or more mortgages, your interest rate on this additional mortgage should remain low. However, if you already have a lot of debt in your current home compared to your equity, your new mortgage will be pricier than your first. This means it makes financial sense to only purchase a vacation home if you have a high amount of equity in your primary residence.

What Happens if I Default?

Defaulting on your new vacation home mortgage will bring different consequences depending on the loan you secure. If you secure a wholly new mortgage on your vacation home, you will lose that vacation home. If you elected a second mortgage on your existing home, you may lose your primary residence. Electing this option is riskier for you and your family. Your first mortgage will be paid off first in the case of bankruptcy if you have a second mortgage on your primary residence. It is best to obtain a wholly new mortgage on your vacation home to limit your exposure to have your assets seized in a foreclosure situation.