Certain Loans to Get More-Expensive in 2022
Vacation home-buying began to surge at the start of the pandemic and it shows no signs of stopping. Workers who are able to work remotely drove this demand as they could clock-in in downtown Cincinnati or at a lake house in upper Vermont and earn the same wages. Vacation home buying was already on an upswing prior to the pandemic, but according to the National Association of REALTORS (NAR), in 2020, vacation home sales rose 16.4% which caused the median existing-home sales prices to rise 14.2% on average for vacation home counties as opposed to 10.1% in non-vacation home counties. Although NAR reported that 53% of vacation home purchases were all-cash, that means 47% of vacation home purchases carried a mortgage of some sort.
Vacation or second-home properties carry more risk than a primary residence. In the event a homeowner who owns both loses his or her job, they are more likely to miss payments on their second home versus their primary residence. Furthermore, if the homeowner is relying on short-term rental income from that second property to pay the bills and something happens to deter vacation home traffic in that area – everything from an economic upset to a natural disaster, that can a present financial challenge as well.
According to the Federal Housing Finance Agency, second-home mortgages that are backed by Fannie Mae and Freddie Mac will see new fees assessed for these types of properties beginning in April 1, 2022. Upfront fees between 1.125% and 3.875% will be due upon home purchase depending on loan-to-value ratio which the lender may either pass along directly by way of that upfront fee or a higher interest rate. These fees will not only help curtail risk, these agencies were designed to help make homeownership more affordable for low- and moderate-income borrowers as second-home borrowers are typically more affluent.
If you have been thinking about buying a second home, you are probably wondering what this means for your purchase. Although it will get more expensive to get a mortgage backed by Freddie Mac or Fannie Mae, there may be other options available including getting a non-government backed mortgage or even getting a loan through a private investor or company. Or simply remember that these fees may now put a second home property closer in line with what lenders charge for investment properties and accept the higher fee.
Remember also, that if the lender passes the fee along directly, that 1.125% to 3.875% is on the loan amount, not the purchase price. If the area you have your eye on has properties that will sell for $500,000, but you are only taking out a loan for $350,000, that upfront fee would be between $3,937.50 and $13,562.50.
Alternatively, you could try to act before the April 1 deadline, although that may not be realistic in some areas. I would suggest contacting your lender right away if you are considering this as he or she will be able to let you know what is realistic from the time an offer is accepted to closing in your chosen area.
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