Prospective buyers are often curious about how to finance the acquisition of a fractional share of a luxury vacation home. Fractional ownership is a new concept and many traditional mortgage brokers are not well-informed about it. What are the financing options for a fractional home purchase?
There are four principal possibilities for how to finance your fractional ownership vacation home. The first, simply, is cash — buy your ownership share by paying for it in full. This is the simplest method, and also probably the least likely. Not everybody has $100K – $400K (or perhaps more) in liquid funds.
The second alternative is to use the equity in your home. Take out a home equity line of credit (HELOC) and use the proceeds to purchase your vacation home fractional share. This practice has several benefits. HELOCs are simpler to get than mortgages; and the interest you pay is tax deductible as mortgage interest on your home. Of course, you may not have an adequate amount of equity in your home to totally fund the acquisition of your vacation home.
Option three is to get mortgage funding. There are a number of companies who provide specialized mortgage products to finance the acquisition of fractional ownership vacation homes. Unfortunately the leading company offering these financial products has recently withdrawn their fractional mortgage products as a result of recent difficulties in the credit markets.
As reported by the Helium Report (March 26, 2008), a periodical covering developments in the fractional vacation home industry, First Fractional Funding left the mortgage business after its lending partner, the National Bank of Kansas City stopped underwriting the mortgages.
A few other companies still continue to provide specialized fractional mortgage products. NextStar Funding, Vacation Finance, and Sterling (MI) Bank and Trust currently remain providers in the fractional lending market. With the tightening of credit in the wake of the subprime lending industry meltdown, purchasers should expect more scrutiny of their loan applications. Fractional mortgage rates may run 1.25{d4f7c08805e41e9b9974dfba619ed7230ec2da6e442055d48085a7994e8adaef} to 1.5{d4f7c08805e41e9b9974dfba619ed7230ec2da6e442055d48085a7994e8adaef} more than residential mortgage products.
The fourth option for funding your fractional ownership vacation home is financing offered by the developer of your fractional residence. Some fractional vacation residences do make available a self-financed option. Typically there is a down payment in the neighborhood of 20{d4f7c08805e41e9b9974dfba619ed7230ec2da6e442055d48085a7994e8adaef} of the total price, and the loan is amortized over a relatively short term (5 years), often with a balloon payment at the end of that time.
With owner financing you can come up with the down payment in cash or by tapping the equity in your primary residence. This method has the advantage of simplicity and ease, allowing you to complete the transaction in a short time and with reduced scrutiny and paperwork.
