How to Finance a Vacation Home: What You Need to Know

27 September 2025

Owning a vacation home sounds like a dream, right? Imagine having a cozy cabin in the mountains or a beachside retreat where you can escape the daily grind. But let’s be real—buying a second home isn't cheap. Financing it requires careful planning, a solid financial strategy, and a good understanding of your options.

If you're wondering how to make your dream vacation home a reality without draining your bank account, you're in the right place. In this guide, we’ll break down everything you need to know about financing a vacation home, from mortgage options to alternative funding methods.

1. Determine Your Budget and Affordability

Before even thinking about lenders or mortgage rates, you need to figure out how much you can afford. Owning a vacation home comes with many costs beyond the purchase price, including:

- Down payment (usually higher than a primary home)
- Property taxes and insurance
- Maintenance and repairs
- Utilities and HOA fees
- Travel expenses to visit the property

A good rule of thumb is to ensure your total housing costs—including your primary home—don’t exceed 36% of your gross monthly income. If the numbers don’t add up, consider a less expensive property or alternative financing options.

2. Mortgage Options for a Vacation Home

Most buyers finance their vacation home with a mortgage, but lenders have stricter requirements compared to primary residences. Here are the main mortgage types to consider:

A. Conventional Loans

A conventional home loan is one of the most common ways to finance a vacation home. However, expect:

- A higher down payment (typically 10-20%)
- Stricter credit score requirements (usually 680+)
- Higher interest rates compared to primary home loans

If you have strong credit and a stable income, this may be your best bet.

B. Jumbo Loans

If you’re eyeing a luxury vacation property, you might need a jumbo loan, which exceeds the loan limits set by Fannie Mae and Freddie Mac (currently around $726,200 in most areas and $1,089,300 in high-cost areas).

Expect:

- Even stricter credit requirements (often 700+)
- A larger down payment (typically 20%+)
- More documentation to prove income and assets

C. Second Home Loans vs. Investment Property Loans

Lenders differentiate between a second home and an investment property:

- A second home must be for personal use at least part of the year.
- An investment property is rented out long-term or Airbnb-style.

Why does this matter? Investment property loans come with higher interest rates and a larger down payment, so if you plan to rent out your vacation home extensively, be prepared for tougher loan terms.

3. Alternative Financing Options

Not everyone wants to (or can) go the traditional mortgage route. If that’s you, consider these options:

A. Home Equity Loan or HELOC

If you have built up equity in your primary home, you can tap into it to finance a vacation home.

- A Home Equity Loan gives you a lump sum upfront.
- A HELOC (Home Equity Line of Credit) works like a credit card, allowing you to borrow as needed.

These options often have lower interest rates than traditional mortgages but put your primary home at risk if you default.

B. Cash-Out Refinance

Refinancing your primary mortgage for a higher amount and taking the difference in cash is another way to fund a vacation home. This could work if:

- Interest rates have dropped since your original mortgage
- You have significant equity in your home

C. Seller Financing

In some cases, the seller may agree to finance the sale directly, allowing you to make payments to them instead of a bank. This can be a great option if you don’t qualify for a traditional loan, though terms will vary.

D. Fractional Ownership or Co-Buying

Can’t afford a vacation home solo? Consider buying with family, friends, or even through a fractional ownership program. This option makes ownership more affordable but requires clear legal agreements.

4. Maximizing Affordability: Renting It Out

Want to make your vacation home a financial asset rather than just an expense? Renting it out when you’re not using it can help cover costs.

A. Short-Term Rentals (Airbnb, Vrbo)

If your vacation home is in a desirable location, short-term rentals can generate significant income. However:

- Many cities have strict short-term rental regulations—check local laws first.
- You’ll need to manage bookings, cleaning, and maintenance (or hire a property manager).
- Rental income is not guaranteed, especially in the off-season.

B. Long-Term Rentals

If short-term rentals aren’t an option, a long-term tenant can provide steady income. However, you’ll lose personal use of the property during the lease term.

C. Tax Benefits of Renting Out Your Vacation Home

If you rent out your vacation home for fewer than 14 days per year, you don’t have to report that income to the IRS! If you rent it for longer, you may qualify for tax deductions on mortgage interest, property taxes, and operating expenses.

A tax professional can help you maximize the financial benefits.

5. Credit Score and Financial Requirements

Lenders have strict requirements for vacation home loans to ensure buyers can afford two mortgages. Here’s what you’ll need:

- Credit Score: Typically 680+, but 700+ for the best rates.
- Debt-to-Income Ratio (DTI): Most lenders want a DTI below 45%.
- Cash Reserves: Many banks require 2-6 months of mortgage payments in savings.
- Stable Income: Lenders prefer borrowers with solid, consistent income sources.

If your credit isn’t where it needs to be, consider improving it before applying for a loan.

6. Hidden Costs to Watch Out For

Beyond the mortgage, vacation homes come with several hidden costs that can add up quickly:

- Property management fees (if you’re renting it out)
- Higher insurance premiums (especially in flood or hurricane-prone areas)
- Seasonal maintenance (snow removal, pool maintenance, etc.)
- Furnishing and décor to make it rental-ready

Budgeting for these expenses upfront can help avoid financial surprises down the road.

Final Thoughts

Buying a vacation home is an exciting investment, but financing it takes careful planning. Whether you go with a traditional mortgage, a home equity loan, or even seller financing, understanding the pros and cons of each option is key.

If renting out your property is part of your plan, make sure to factor in taxes, local regulations, and management costs. And most importantly, ensure that your vacation home fits comfortably within your budget so it remains a source of joy—not financial stress.

So, is a vacation home the right move for you? With the right financing strategy, that dream getaway might be closer than you think!