Considering purchasing another dwelling? Here's what you need to be aware of before you make your decision.
In the real estate market of 2025, the demand for mortgages for second homes is experiencing a unique blend of challenges and opportunities. Here's a closer look at the key trends and factors shaping this landscape.
Higher Mortgage Rates for Second Homes
Second homes often come with higher mortgage rates compared to primary residences. In August 2025, borrowers with good credit (FICO 720) were typically paying around 7.7% for second home mortgages, contrasting with primary 30-year fixed loans that averaged around 6.4–6.8%. This difference is due to the perceived risk associated with second homes.
Influence of the Federal Reserve and Economy
Mortgage rates have risen in response to the Federal Reserve's rate hikes aimed at combating inflation. Economic factors such as inflation and bond market yields, particularly 10-year Treasury yields, significantly impact mortgage rates.
Stricter Lending Requirements
Lenders have become more stringent in their requirements for second home mortgages. This includes asking for larger down payments (often exceeding 20%) and more detailed financial documentation due to the higher perceived risk.
Shifting Buyer Preferences
Buyers are increasingly drawn to second homes in outdoor-centric, waterfront, or locally relevant destinations with greater value. This shift away from historically high-demand luxury markets like Aspen or Malibu is due to price accelerations and limited inventory.
Demand and Pricing Trends
While the share of second home mortgage rate locks has dropped slightly below pre-pandemic levels, luxury second home prices have risen substantially in some emerging markets. For example, Coeur d’Alene, ID, and Williamson County, TN, have seen year-over-year increases of +52% and +42%, respectively.
Effect of High Mortgage Rates on Housing Turnover
Higher mortgage rates have slowed overall housing turnover, including second homes. Some homebuilders are adjusting supply dynamics by increasing incentives and building spec homes.
Recent Improvements
Recent improvements in mortgage rates, combined with increased seller willingness to negotiate, are improving the outlook for second home purchases as of mid-2025.
In summary, the combination of elevated but somewhat easing mortgage rates, stricter lending, changing buyer location preferences, and sustained luxury market demand are shaping second home mortgage demand in 2025. Buyers with strong finances who treat second homes as investment opportunities or rentals continue to find potential value despite these headwinds.
Classification of Vacation Homes
The Internal Revenue Service classifies a vacation home as either a personal residence or a rental property, depending on usage and rental days.
Demand for Second Homes
The demand for mortgages for second homes is at its lowest since at least 2018, due to high housing costs, steep mortgage rates, and return-to-office work mandates.
Buying a Second Home as an Investment
A second home can act as a buy-and-hold investment, potentially appreciating in value over time and serving as a valuable asset to pass on to heirs. It's possible to qualify for a loan on a second home if one can afford the loan on their primary residence and the second home doesn't strain the budget.
Renting Out a Second Home
Owning a second home can provide a diversification of investments beyond stocks, bonds, and 401(k) plans. Rental income can help subsidize a vacation property, but it's important to understand local zoning regulations and condo, co-op, or HOA bylaws that may restrict rentals. Short-term Airbnb rentals are popular in many areas but are illegal or heavily restricted in others.
Before buying a second home, consider the full financial impact, including double mortgage payments, utilities, maintenance, potential HOA fees, and rental management fees. It's also essential to consider whether the exact times you want to use your property may conflict with peak rental demand.
- In the realm of personal-finance, investors must be fully aware of the different mortgage rates for primary residences and second homes when planning to invest in real-estate.
- Despite the demand for mortgages for second homes being at its lowest since 2018, some buyers with strong finances still view them as potential investments or rental properties, given their long-term value appreciation and the possibilities of rental income.
