How to Finance the Fractional Ownership Vacation Home

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 model and many conventional mortgage brokers are not aware of it.

What are the options to finance a fractional property purchase?

There are four primary possibilities for financing your fractional ownership vacation property. The first, and most straightforward, is cash -- acquire your fractional share outright.

This is the simplest method, and perhaps the most out of reach. Not everyone has $100K - $400K (or perhaps more) in liquid funds.

The second option is to make use of the equity in your primary residence. Obtain a home equity line of credit (HELOC) and use the money to fund the purchase of your vacation home fractional share.

This technique has many advantages. HELOCs are less trouble to obtain than conventional mortgages; and the interest you pay counts as a tax deduction as mortgage interest on your primary residence. Of course, you may not have enough equity in your primary residence to fully fund the acquisition of your vacation property.

Option three is to obtain a mortgage. There are a number of lenders who offer specialized loan products to finance the acquisition of fractional ownership properties. Unfortunately the largest and most prominent company offering these financial products has just withdrawn their fractional lending products as a result of recent upheavals in the credit markets.

As reported by the Helium Report (March 26, 2008), a periodical reporting developments in the fractional vacation home industry, First Fractional Funding pulled out of the mortgage business after its lending partner, the National Bank of Kansas City stopped providing the loans.

A small number of other companies are continuing to provide specialized fractional mortgage products. NextStar Funding, Vacation Finance, and Sterling (MI) Bank and Trust continue to be viable players in the fractional lending arena. As credit tightens after the subprime lending industry meltdown, purchasers may expect more scrutiny of their mortgage applications. Fractional mortgage rates can easily run 1.25% to 1.5% more than conventional mortgage products.

The fourth option for funding your fractional ownership vacation home is a loan product offered by the developer of the fractional project. A few fractional vacation homes do provide a self-financed option. Generally there is a down payment in the neighborhood of 20% of the purchase price, and the loan is amortized over a relatively short term (5 years), sometimes with a balloon payment at the end of that time.

With owner financing you can provide the down payment in cash or by using the equity in your residence. This method has the benefit of simplicity and ease, and you may complete your purchase in a short time and with minimal scrutiny and paperwork.

See an example of fractional ownership financing by owner/developer.

More fractional ownership resources!

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