How to Buy a Vacation Home Without Tapping Home Equity

By eHow Personal Finance Editor

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Purchasing a second home is an attractive option if you would like to frequent a second location. It can also be a good investment if you buy the right home in the right location. However, it's best to not risk your first home to buy a second one. Using the equity in your first home to get a loan could put it in danger if your finances suddenly change.

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Instructions

Difficulty: Moderate

Step1

Check the real estate market for less expensive homes which are suitable for a temporary living situation. You might only need a small house if you're only going to use it once a month, and it might not have to be right on the beach but a short drive away. Making a short drive might be a small trade-off for being able to protect your primary home.

Step2

Consider second homes that need some work. These homes will be cheaper, and not only will this help you avoid having to take out a home-equity loan, it could make for a better investment. You can fix the home gradually as you have the money and as you need to use the house. Renovating a house could lead to larger profits when it comes time to sell.

Step3

Clear your debt. Eliminate debt, such as credit card bills and car payments, to give you more money coming in every month.

Step4

Start saving more money. With your debt eliminated, you can start putting more money toward savings. To buy a second home without using equity, you'll need substantial liquid assets, such as savings.

Step5

Look for all your potential liquid assets to add money to your savings. This could be stocks and bonds, or it could be a collection of old baseball cards

Step6

Make a large down payment on your second home with the savings you have built up. This will reduce your monthly costs and make it possible to fund the house with a loan which does not tap the equity from your first home. For a second home, a 20 percent down payment may be required, but make a larger one if possible.

Tips & Warnings

When using savings for the down payment on a second home, be sure to leave enough savings to live on for at least six months in case you need it.
Renting your second home while you're not using it can help generate money for the loan payments.