If you’re looking to buy a vacation home, the most important factor many people will consider is the vacation home mortgage rate. Just like a mortgage on your primary residence, no one wants to pay more interest than necessary.
But mortgage rates are typically higher for vacation homes for one good reason – risk. Lenders view a home you don’t live in full-time as risky. You don’t have as much to lose if you default on a vacation home as you do if you default on your primary home. You’ll still have a place to live, but the bank would be out their money.
So, how much higher are vacation home interest rates, and what do you need to know? Check out our guide below on vacation home interest rates.
What rate can you expect?
Of course, everyone wants to know – what’s the rate? While every situation differs based on the property, your qualifying factors, and the market, you can expect to pay rates that are 0.25% to 0.5% higher than you would for a primary residence.
Today’s interest rates are still low, making it a great time to buy a vacation home. On average, primary homeowners pay 2.875% – 3.0% in the United States (according to the posted rates of the “Big 4 Banks”) and 2.34% – 2.65% in Canada (according to the posted rates of the “Big 5 Banks”). For more information on these rates, click on the following links:
- US Banks: JPMorgan Chase, Bank of America, Citigroup and Wells Fargo
- Canadian Banks: Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Toronto-Dominion Bank
Based on these average rates (using today’s rates), vacation homebuyers can likely expect to pay 3.125% – 3.5% in the US and 2.59% – 3.15% in Canada.
How do you secure the best rate?
The rates above are estimates – the actual rate you’ll receive depends on your qualifying factors. Because vacation homes have higher risks, lenders often charge higher vacation home interest rates, but to keep your rate down, do the following:
Improve your credit score
Pull your credit (free copies for US borrowers here and Canadian borrowers here) and see what you can improve on. Do you have late payments? Bring them current. Did you overextend your credit cards (that charge more than 30%)? Pay the balances down. Also, don’t apply for any new credit between now and when you want to apply for a vacation home loan.
Keep your debt-to-income ratio low
Your debt-to-income ratio tells lenders how much you can afford based on your current debts. The lower your DTI, the more mortgage you can afford. The lower you keep your debts, the higher your chance of securing the lowest interest rates.
No matter your qualifying factors, it’s always important to shop around for the best vacation home mortgage rate. The rates mentioned above are for illustrative purposes, and are the best rates a lender may offer, but only to those with great qualifying factors.
What are some of the vacation home lending criteria?
Every lender differs in their requirements, but you’ll likely need to meet these requirements to qualify for a vacation home loan.
- At least a 640-credit score – Vacation home lenders require higher credit scores to ensure that you won’t default on the loan. Many lenders require at least a 640-credit score, but some require even higher scores. The higher your score, the lower your risk of default and the higher your chance of approval.
- 20% or higher down payment – Most lenders require a 20% – 30% down payment on a vacation home. The higher down payment reassures lenders that you’ll make your payments on time, so that you don’t risk losing the thousands of dollars you invested in the home.
- Debt-to-income ratios of 43% or less – Your debt-to-income ratio tells lenders how much debt you have outstanding compared to your monthly income. They use this number to determine if you’re an acceptable risk and how much they should (or shouldn’t) adjust your vacation home mortgage rate to account for the risk. For more information on how to calculate your debt-to-income ratio, click here.
Alternatives to second home mortgage
If you don’t want to pay higher vacation home interest rates, there are alternatives to secure financing to buy your dream vacation home.
- Second mortgage on your primary residence – If you have equity in your primary home (the difference between the home’s value and what you owe), you can use it to buy another home. You’ll need to take out a second mortgage or do a cash-out refinance on your first mortgage to get the cash, but you can use it as a down payment on your vacation home.
- Home equity line of credit – Similar to the above, if you have equity in your home but want a flexible second mortgage, a HELOC is a good option. It works like a credit card, giving you a credit line equal to the amount you can borrow. You owe interest only on the amount withdrawn (used). After a certain period of time, however (e.g. ten years) you may owe regular principal and interest payments. This can be a good way to get money for the down payment on a vacation home.
- Reverse mortgage – If you’re 62-years or older in the United States or 55 years or older in Canada (both you and your co-borrower) and you don’t have a first mortgage on it, you can use your home’s equity to buy a vacation home. Many retirees do this to enjoy their golden years in another home without taking out a mortgage. Reverse mortgages don’t require repayment until the owner moves or passes away.
If you plan to rent out your vacation home while you’re not using it, you may be able to use the projected rental income in with your income to secure a mortgage. This may increase your borrowing capacity (allowing you to borrow more) or allow lenders to give you a lower vacation home mortgage rate if it decreases your debt-to-income ratio or serves as a compensating factor.
Overall, a vacation home is a higher risk for lenders, which means you must illustrate that you aren’t a high risk of default. If you’re curious about how much you can afford on a vacation home mortgage or what it would cost you, use this vacation home mortgage calculator to see where you stand.