How To Finance Your Vacation Home and Save Money For a Mortgage Downpayment
The toughest part about buying any home is coming up with the escrow money, or deposit. The most common method of buying a vacation home is using the equity in your primary home through a cash-out refinancing loan. If you've owned a home in a popular metropolitan area for 10 or 20 years, you've probably paid down a substantial portion of the mortgage, and gained a considerable amount of equity. With cash in hand, you're on top of the game, especially if you have enough to buy the home you want without a mortgage.
But what if you want to buy before vacation property values go out of sight. What if you live in an apartment? Or, you've only owned your primary home for a few years? The last several years show resort condos and vacation homes appreciating more quickly than just about every other category of real estate. Many resort areas are going up 15% a year or more. Obviously, you're going to need a plan that will help you save quickly. You'll need enough money, not only to come up with a downpayment, but to pay off enough of your new home to support a mortgage within your budget.
Determine exactly how much you can save on a regular basis
Whether it $20, $50, $100 a week, you need to set up a plan you can afford that will regularly contribute to your goal. Determine an amount that you can save at regular intervals. The best way is through payroll deduction where you never even see the money—it goes directly into your vacation home fund. You've done this for Christmas funds, even vacation funds. You can do it for your vacation home.
Set your savings aside in a central location
You can use a savings account with FDIC protection, a Roth IRA, a credit union, money market fund, or whatever you feel comfortable with. A savings account is the safest way, but not always the fastest. Credit unions will often have higher interest rates, but they're not always protected through FDIC. In the late 80's, many credit unions suddenly closed their doors in Rhode Island because of an embezzlement scandal that bankrupted the main insurance company. It took over a year for the money to be returned to thousands of account holders. Make sure your account is protected by FDIC.
Roth IRA's and money market accounts will also generate higher interest rates, and allow you to withdraw the money if it becomes necessary. These will usually require a minimum balance and/or a monthly deposit. Again, these types of savings accounts are tied to specific indicators, stocks and bonds in the market, so they do contain some risks. You can also set up a plan with a financial advisor to reach your goal over a fixed period of time.
Other ways to save money
Most of these are obvious, but if you do them all, you'll have your vacation home quicker than you thought.
- Pay down your loans - Whenever you pay down your loans, put the most towards the loan with the highest interest rate. Most people will try to pay off the largest loan first. When you're searching for a loan, you look for the one with the lowest interest because it saves you money, right? It works the same way with paying off loans. Pay off the highest interest rate first and it will cost you less to accomplish the same goal. When you finish a loan, say a credit card or auto loan, contribute those payments into your vacation home fund.
- Save your pocket change - Save your dollar bills, too. Don't use change or one dollar bills whenever you make a purchase. Save all that money and deposit it into your fund every other week, no matter how little it is.
- Start a part time business - Everyone has something they do well, and even enjoy doing. Whether it's landscaping, or making crafts, or even working on the internet as a freelancer. There's something you can do for 3-5 hours a week that will earn extra money towards your vacation home. You know what you enjoy doing—try making some money at it. You never know, you may find yourself a new job at the same time, one where you're the boss!
- Student loans? - You can cut your monthly payments up to 50% on student loans. When you apply for a mortgage, the criteria for approving your loan isn't based on the total amount of your other outstanding debts. It's based on your total monthly payments.
If you do all of these things, you'll be amazed how quickly you can save money. The key is setting the goal, and making sure the contributions are steady and reliable. Once you have your vacation home, you can continue with the same plan and use it to pay the mortgage, or to reach another goal!
When you're ready to buy
Arm yourself with information and "buyer strength". Buyer strength is what will make people work harder for you, and make your offers more attractive to vacation home sellers. You can pre-qualify yourself to find out what you can afford. But getting pre-approved gives you strength. This tells both the Realtor and the seller that you're ready to buy a home within a specific price range. You have a mortgage ready-to-go. That takes a lot of stress off them, and makes your offer much more attractive.
Your downpayment makes a difference, too. It should be between 5-10% of the selling price. Both the seller and the Realtor will be much more comfortable knowing that you are committed to the sale. Generally, if there's more than one offer on a property, your "buyer strength" will be the determining factor, because taking a home off the market for a period of time makes it much harder to sell later on. It becomes "old inventory" that may have something wrong with it in the view of other buyers and Realtors. A strong downpayment and a pre-approved loan could get your offer accepted over a higher offer.
Your buyer strength will also make Realtors compete for your business. Research 3 agents in the area you want to buy and contact them. Let them know that you're approved for a specific amount, you have the downpayment ready, and you'd like to know what they can do for you to help find the property you want. Describe the price range and property in detail, and let them know you've contacted other Realtors, and will choose the one with the best response. It won't take long to find the agent or broker that will work hardest for you. And, choose only one. Otherwise you'll find yourself at the end of the information line.
A Realtor works hardest for the buyer that's most committed to them. They know the areas, and they can give you inside information. Most states allow buyer representation, and where this is true, most Realtors will ask that you sign a Buyer Representation Agreement at some point. You don't have to sign the agreement, but there's one very important fact to remember—if you don't sign a buyer representation agreement, in most states the agent will automatically be working for the seller. Generally, the cost of this comes out of the proceeds of the sale, and doesn't cost you anything more than if you had not signed the agreement. That's because most states now recognize that it takes two parties to make a sale. The seller still retains the right to set the commission rate (which is done prior to putting the property on the market), but a buyer who has a signed buyer representation agreement has the Realtor working in their interest—not the seller's. Your agent will advise you of known defects and potential problems. Your agent will negotiate on your behalf. When buying any property, you want your agent to represent you.
US Vacation Real Estate Directory
Buying
Many states now have real estate agents that will represent you, while the selling agent represents the seller. You can have your own agent working in your interest.
A full time real estate agent in a vacation area knows what's on the market and what's new every day. If you've always wanted your own getaway in your favorite destination, click on the state of your choice and find a Realtor who'll work for you.
Selling
When selling your vacation property, one of the most important features in this market is the Real Estate agency's web presence. Most vacation properties nowadays are first located on the internet.
We hand pick most of the companies and invite them to list on our site. Through the links below, you'll generally find real estate companies with extensive internet marketing networks.
