New vacation-home loan fees complicate purchasing

Americans developed a voracious appetite for homes during the pandemic, with many going for “seconds” — sparking record-high vacation home purchasing.

But in March, vacation home sales dropped “sharply for the second consecutive month,” according to Redfin, although sales remain up 13% compared to prepandemic levels.

Now, higher mortgage rates generally, as well as new fees of between 1.12 and 3.87 of the loan amounts on most second-home mortgages, will dampen the vacation home market, says Taylor Marr, a Redfin economist.

Still, this market isn’t about to crater, says Gay

Cororaton, a National Association of Realtors economist, since onehalf of vacation homebuyers pay cash.

Before the fees, most borrowers who needed financing took out a separate mortgage, says Jennifer Beeston, SVP of Guaranteed Rate.

The fees, which increase when loan amounts grow closer to the purchase price, are charged in the form of a higher interest rate, Beeston explains.

A strategy for borrowers with lots of equity in their primary home might find it more economical to tap that equity to pay the fee upfront and lower their interest rate over the life of their second home mortgage, (Any mortgage borrower can pay an amount known as points upfront to lower the loan rate.)

Owners with substantial equity in their primary property might take out a cash-out refinance on that home and use those proceeds to buy a second home, says Matt Hackett of Equity Now in Mamaroneck, N.Y.

But if buyers are feeling squeezed financially, maybe they shouldn’t be buying a second home, says Scott Bishop, a Houston,

Texas, financial planner.

For one thing, if buyers increase the loan amount on their primary, they could risk that home should financial distress arise.

Moreover, Bishop warns against thinking of a second home as an investment, since maintenance, taxes and other costs usually eat up price appreciation.