Guide: Financing a Vacation Home

in Financial Planning, Personal Finance Essentials by

Last week, we explored some factors to think about if you’re considering buying a vacation home. Now, let’s look at determining whether the numbers make sense for this type of lifestyle investment.

There is a considerable amount of number crunching that goes into determining whether a vacation home is right for you – and whether you can afford it.

Vacation Home Loans

As with any home loan, interest rates play an important role in your purchase, so you’ll want to find a lender that can offer a product with the best rates and terms. Here are some steps you can take for this process:

  • Know your credit and check your report for errors – you can pull your free credit report from www.annualcreditreport.com. It’s a good idea to get all credit checks accomplished within 30-60 days, so you don’t negatively impact your score with too many inquiries
  • Shop around for lenders for the best rate – a good rule of thumb is to talk to at least three lenders and approach your bank to see what else they can offer
  • Consider consulting a local market expert, since some markets prefer local lenders

There are typically three main options when it comes to loans on a vacation home. A primary residence loan is used for buying a home to live in, which means you will have to live in your property as your primary home for at least one year. An investment property loan is for buying a home you want to rent out, which allows you to use the home when it’s not rented. You can use rental income to help you qualify. Lastly, a second home loan is meant for buying a vacation home for personal use only – make sure to read the fine print, since most agreements say you can’t rent out the home for a certain period of time.

Each type of loan fits different needs and has certain benefits and drawbacks. Talk to a lender or financial advisor to see which loan best fits your needs.

Vacation Home Tax Considerations

Taxes are complex and can get more complex when it comes to your vacation home. Generally when it comes to a vacation home, you can:

  • Deduct mortgage interest the same way you would for your primary home
  • Deduct up to 100% of the interest you pay on up to $1.1 million of total debt between both vacation and primary homes
  • Deduct property taxes on your vacation home
  • Rent out your home for up to 14 nights each year without that income being reported to the IRS

You cannot write off any costs associated with utilities, upkeep or insurance, and if you sell your vacation home, you will likely have to pay the usual capital gains tax.

You’ll want to consult a tax professional before making any kind of decision that could cause a taxable event, such as buying a vacation home.

Your Retirement Portfolio & Your Vacation Home

Are you thinking about using your vacation property as the home you’ll retire in? If so, you should decide whether you want to rent or sell your current place, and how you will use the equity. If you have enough equity in your current home, you may be able to use it to pay off your vacation home – or you may decide to invest it. Discuss this with your financial advisor to decide what makes sense for you and ensure you’re on the right track for retirement.

The Takeaway

Because there are considerable financial topics you should think about when considering this purchase, a financial advisor can help you understand how a vacation home can fit into your long-term strategy.

Read our free Personal Capital Vacation Home Buying Guide for more information.

Case Study: Financing a Vacation Home

The following two tabs change content below.
Amin Dabit, CFP®

Amin Dabit, CFP®

Amin Dabit is the Director of Advisor Services with Personal Capital. Along with the EVP of Advisory, Amin helps lead Personal Capital’s financial planning experience and advice. Amin brings over a dozen years of experience in private wealth management and financial planning. Amin works with the advisory team to identify and establish strategies for reaching clients' financial goals by providing comprehensive, customized financial advice designed to improve their financial lives.
Amin Dabit, CFP®

Latest posts by Amin Dabit, CFP® (see all)


Leave a Reply

Your email address will not be published.

Disclaimer. This Website may contain links to third-party websites. These links are provided solely as a convenience to you and does not imply an affiliation, sponsorship, endorsement, approval, investigation, verification, or monitoring by PCAC of the contents on such third-party websites. Please be advised that PCAC is not responsible for the content of any website owned by a third party.