What kind of mortgage is the best type for a vacation property?
This information, from the book “Road Map to your Vacation Property Dream” is being quoted with permission of the author, Christopher Cain.
According to Terry Edwards, president and chief executive officer of Cendant Mortgage, “there are a variety of programs that allow customers to purchase vaction properties as second homes or as investment properties: fixed-rate, adjustable-rate, ballon, etc. For your convenience, a definition of each of these products is provided below. Your mortgage consultant will help you find the option that best suits your specific needs.
However, because fo the stability it offers, a 30 year, fixed-rate mortgage is an excellent option. A fixed-rate mortgage ensures that your principal and interest payment will never change for the life of the loan. In addition, a fixed-rate mortgage calls for a 10% down payment, while adjustable rate and balloon mortgages typically require a 20% down payment. For example: On a 30 year fixed mortgage of $125,000 with a 7% interest, zero points, and a 10% down payment, your APR (annual percentage rate) would be 7.57% (including 15 days of per diem interest and fees for tax service, flood certification, application, credit report, appraisal and private mortgage insurance) and your monthly payment would be $885.79. That’s quite a big difference in funds.
The amount of interest paid over the life of the loan is more a function of the term than the rate. If paying the loan quicker is a goal, you can make additional payments each month to pay off the loan before the end of 30 years. However, if there is a month when cash is needed for other uses, you can always make the regular 30-year payment.
An adjustable-rate mortgage does offer some advantages:
- lower initial payment,
- easier to qualify for than fixed-rate, and
- ability to take advantage of declining interest rates during each cycle. Then again, interest rates may not decline. In fact, they could go up.
Terry Edwards continues, “I would ask one question: ‘Will you be living in the property for more than 3 years?’ If the answer is yes, I strongly suggest a fixed-rate loan. If no, I discuss the specifics of the transaction, keeping in mind that fixed-rate loans (including hybrid fixed-rate loans) are currently at very low levels.”
