Prospective buyers are frequently curious about how to financially arrange for the acquisition of a fractional share of a luxury vacation property. Fractional ownership is a new concept and many conventional bankers are not aware of it. What are the options to finance a fractional property purchase?
There are four primary alternatives for financing your fractional ownership vacation property. The first, and most straightforward, is cash -- purchase your ownership share outright. This is the simplest method, and maybe the least likely. Most people don't have $100K - $400K (or more) in liquid funds.
The second alternative is to utilize the equity in your primary residence. Get a home equity line of credit (HELOC) and use the proceeds to fund the purchase of your vacation home fractional share. This technique has many benefits. HELOCs are simpler to get than mortgages; and the interest on the loan counts as a tax deduction as mortgage interest on your primary residence. Of course, you may not have sufficient equity in your primary residence to totally fund the acquisition of your vacation property.
Option three is to find mortgage funding. There are a number of financial institutions who market specialized loan products to finance the acquisition of fractional ownership properties. Unfortunately the leading company providing these mortgage products has just withdrawn their fractional mortgage products as a result of recent challenges in the residential lending industry.
According to the Helium Report (March 26, 2008), a periodical covering news in the fractional vacation home industry, First Fractional Funding left the mortgage business after its financial partner, the National Bank of Kansas City stopped underwriting the mortgages.
Several other businesses will continue to underwrite specialized fractional mortgage loans. NextStar Funding, Vacation Finance, and Sterling (MI) Bank and Trust remain viable players in the fractional lending arena. As credit tightens after the subprime lending industry meltdown, purchasers may expect a closer look at their loan applications. Fractional mortgage rates are likely to run 1.25% to 1.5% more than conventional mortgage products.
The fourth option to finance your fractional ownership vacation home is financing offered by the developer of the fractional project. A few fractional vacation residences do make available a self-financed alternative. Typically there is a down payment in the neighborhood of 20% of the total price, and the loan is amortized over a relatively short term (5 years), sometimes with a balloon payment at the end of that period.
If you are able to get owner financing you can make the down payment in cash or by utilizing the equity in your primary residence. This method has the advantage of simplicity and ease, allowing you to complete your purchase in a short time and with minimal scrutiny and paperwork.
