equity Archives

Homeowners being handed keys owning a lake home

Home ownership is a big deal and a large part of the American dream. And when that home is a lake home, it makes the dream even more vivid. But owning a lake home is no walk in the park. It requires long-term commitment and a ton of responsibility to keep the place up and running.

The maintenance in and of itself is a lot to keep up with, and at a lake home, maintenance is an even bigger factor.

That’s why so many choose to just rent vacation homes for a few months at a time rather than buy them.

So how do you decide when it’s a good idea to opt for ownership? Let’s take a look at some common advantages and disadvantages of owning a lake home. That way, you can make a sound decision about what’s best for you and your family in the future.

The Advantages of Owning a Lake Home

Most of the advantages of owning a lake home are glaringly obvious, while some aren’t as easy to spot at face value.

First, mortgage costs–which are typically fixed-rate payments–are more stable and predictable than rental rates, which are known to fluctuate. Additionally, buying is often cheaper than renting.

When making the switch from renting to owning, the average person adds one bedroom and 400 square feet to their home, according to Zillow’s 2017 Consumer Housing Trends Report.

Assuming they make a 20 percent down payment and a typical monthly rate, the average renter could buy a larger home and still pay $330 less each month on their mortgage than if they were renting.

Also, when market conditions are stable, homes tend to increase in value and build equity, making them sound financial investments. If you use your lake home as a second home, renting it out a few times during the year can speed up the process and make for an extremely lucrative source of residual income.

According to Home Away’s Vacation Rental Marketplace Report, in 2014, vacation rental owners charged an average rental rate of $1,520 per week ($217/night). That translates to a residual annual income of $27,360 for the owners, and that’s just on average.

Home Away also noted that 54 percent of vacation homeowners cover at least three-quarters of their mortgage costs by renting their homes to vacationers. In short, owning a vacation home can make you some money.

Additionally, owning a home creates an asset that will only increase in value for years to come.

The Disadvantages of Owning a Lake Home

Homeowner struggling to calculate bills of owning a lake home

As with any home, ownership of a lake home does come with its disadvantages.

For starters, owning a home is essentially growing roots. It ties you to your community and makes it difficult to just pick up and leave.

This long-term financial commitment includes high up-front costs like down payments, closing costs and moving expenses. Plus, in many cases Home Owners’ Association fees are inevitable.

It’s also harder to qualify for a loan on a second home than on a primary residence. Those shopping for secondary residences are often expected to have higher credit scores and put more money down.

According to U.S. News and World Report, the higher down payments reduce the lenders’ risk if the borrower defaults, which is seen as more likely with second homes.

Another disadvantage: as a homeowner, all repairs and maintenance responsibilities fall on you.

Lake house dock repair — Photo courtesy of HMB Lake Norman.

And lake homes tend to require more frequent repairs and maintenance. Since lakes are usually surrounded by more trees than the average neighborhood, structural damage to roofs/buildings are a real threat.

Lake homeowners also have to fight against mold and mildew, which is more prevalent thanks to all the moisture in the air.

In addition to all of that, traditional wooden docks tend to have a lifespan of 20-25 years. This can be shortened in the face of environmental factors like storms or water damage, so frequent upkeep is a necessity.

These disadvantages, while inconvenient, are inevitable aspects of owning a lake home. But do the pros outweigh the cons?

So Is It Worth It?

Man sitting on lake dock enjoying sunset

The good thing about lake living is that the experience varies greatly depending on what lake you choose to buy on, so you have options.

Purchasing a home in a small, suburban community that has a tiny lake for aesthetic purposes is a lot different than buying a waterfront estate on New York’s Lake George.

Lakes are perfect for those who prefer peaceful, tranquil living to hectic city life. And if you actually like hectic city life, there’s a lake for that.

Do you like hiking, mountain biking, skiing or sledding? There’s a lake for that. Are you into nature photography, hunting or fishing? There are so many lakes for that.

Purchasing a lake home has its disadvantages that are similar to what you’d face buying any home.

However, it’s a sound financial investment, a valuable generational asset, and it offers a certain lifestyle you wouldn’t be able to find anywhere else.

Whether you plan to live there full time or visit only when the weather’s nice, buying a lake home is totally worth it.

Home equity, or the difference between the value of your home and what you still owe, is a key component of your finances.

Your equity can act as a financial cushion for emergencies, or provide your family with a healthy nest egg for the future. In fact, building equity is one of the first steps to accruing wealth.

Equity is awesome, and there are a million online articles that report what it is, why it matters and how to cash in on it. However, there isn’t a lot of information about effectively building equity on lake homes, most of which are secondary homes.

Let’s take a look at some key factors that actually matter when it comes to your lake home’s equity.

Equity and Down Payments

When buying a home, the larger your down payment, the more equity you’re starting out with. Hefty down payments also ensure lower mortgage rates, which is always a plus.

Ideally, 20 percent is the golden standard, but it’s certainly not a requirement. According to Zillow’s 2017 Consumer Housing Trends Report, only a quarter of buyers pay 20 percent of their home’s price upfront.

Most lenders will accept as low as 3 percent, although it’s best to put down as much as possible. A disadvantage of smaller down payments, however, is they yield a premium–private mortgage insurance (PMI)–to cover the extra risk that lenders take.

When it comes to secondary homes, however, there are a few more factors that go into down payments and building equity.

Qualifying for a mortgage on a secondary home is exponentially harder. Lenders assume that, in the event of hard times, homeowners are more likely to default on their vacation homes than their primary residences.

This means inevitably more resistance and red tape in the home buying process.

Buyers should expect to provide at least a 20 percent down payment in the case of good credit (725 to 750, typically). For lower scores, up to 35 percent down isn’t unheard of.

Lenders take a deeper look at your debts compared to your household income, sometimes including full income and asset documentation. There are also higher interest rates and tighter guidelines on second homes.

This would explain why, in 2018, 39 percent of vacation home buyers paid cash. It’s simply easier to do so for those who have the means. And paying cash eliminates the need to build equity, since it’s already at 100 percent from the start.

However, equity in a lake home isn’t as liquid as on primary residences. Since vacation homes are seen as luxury properties and not necessities, they may take longer to sell.

This means that in the event of a financial emergency, it won’t be as easy to tap into your lake home’s equity for help.

Use Rental Income to Pay Toward Your Principal Balance

For those who are in no hurry to cash in, though, there’s a clever way to build equity faster.

In addition to a host of taxes and fees, mortgage payments also cover interest and principal balance. As in general real estate, the faster you pay off the principal balance, the faster you build equity. That’s assuming, of course, your home value stays the same or increases.

The following is an example from LendingTree.com. Let’s pretend there’s a $300,000 house–with a 30-year mortgage at a 4.5 percent interest rate–that Person A bought in March of 2018.

Below is the difference between the standard repayment schedule and how fast Person A could pay it off by putting $500 per month toward his or her principal balance.

As you can see, an extra $500 per month toward her loan’s principal balance saved Person A more than $107,000 in interest. It also allowed him to pay his home off nearly 12 years faster.

The good thing about owning a secondary, or vacation, home is you don’t need to pay the mortgage all by yourself.

In 2014, vacation rental owners charged an average rental rate of $1,520 per week ($217/night). That translates to an average residual annual income of $27,360 for the owners.

Using rental income to pay off your lake home’s principal balance is a smart financial move that requires minimal effort, aside from cleaning costs. Renting the property out for a few months a year means the house basically pays for itself.

When paying your mortgage, remember to specify how much you want to go toward your principal. Keep in mind to check with lenders and ensure that paying off your home faster won’t result in prepayment penalties.

Make Some Home Improvements

Making some improvements around the house not only makes it easier to sell later, but builds equity.

However, while some updates can help you, others simply cost more than they’re worth. Therefore, it’s important to consult a real estate professional before investing in home improvements.

According to Realtor.com, some common updates that show a negative return on investment include master suite, bathroom and deck additions. While these projects may be glamorous and popular, they often cost twice as much as their resale values.

Realtor.com advises “less is more”. In fact, simple tweaks like attic insulation, garage door replacement and minor kitchen remodeling offer the best returns on investment.

Landscaping, bathroom improvements and fresh coats of paint can help increase the value of your lake home, too. Sellers would benefit from energy-efficient updates and smart home additions as well.

Lake home owners face different obstacles when it comes to home financing and equity. But if done right, you could ensure financial security for years, and generations, to come.

Tag: equity

The Advantages and Disadvantages of Owning a Lake Home