Written by
Dan Rafter Read Time: 3 minutes
Buyers, developers, and mortgage companies are always looking for creative ways to finance second homes. The "fractional mortgage" has been gaining traction and popularity for more than a decade as an attractive way to buy a vacation property.
Wealthy consumers who wanted their own private jets were the original users of the concept behind fractional mortgages. Multiple owners would pool their resources, and share the financial burden, as well as the aircraft. In the mid-1990s, fractional ownership made its debut in the real estate market.
What's a fractional mortgage?
As its name implies, a group of people-usually family members, friends, or business partners-join together to buy the property as a team, then divide the ownership into fractions or portions. Since the costs and the benefits of owning the home are shared, the fractional mortgage makes it easier for everyone involved, while delivering the ultimate prize-namely, your own vacation property, albeit on a shared basis.
Some of the biggest players in the fractional ownership market are hotel chains or similar entities that are already in the business of vacations and short-term lodging. They manage the units and sell fractions as shares. Unlike conventional timeshares, the prices are generally higher, because ownership is divided among fewer people. These companies then sell shares, or fractions, at a premium to underlying real estate values, and typically pocket a profit of about 20 to 25 percent. Maintenance fees are steep; so many owners rent a portion of their allotted time to others, to make money to offset the costs. For most people who want to buy a vacation home, but don't plan to use it for more than a few days or weeks per year, the added convenience easily justifies the cost.
Special mortgage traits
Here are some of the features of fractional mortgaged homes:
- Each owner gets an equal number of days a year to use the property.
- Owners typically buy shares from a management company, which handles maintenance as well as scheduling of usage.
- Like timeshares, fractional ownership homes can be rented, sold, or given away as an inheritance.
- Unlike timeshares-which usually cost a few thousand dollars-fractional ownership can cost $150,000 or more, depending upon the property.
Lenders normally avoid making fractional mortgages, for the simple reason that, if one participant defaults, it can be hard to foreclose. That's because other owners have a right to keep their share of the home. As a result, most fractional mortgages are offered by builders or developers.
If you calculate how much you spend each time you rent a hotel, condo, or holiday house for a vacation, it doesn't take a financial wizard to understand that you aren't getting much of a positive return on your investment. Thanks to the emergence of fractional mortgages, however, having a second home to call your own may not be such a far-flung concept. On the contrary, it may be entirely practical, attainable, and financially feasible.
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Fractional mortgages are an intriguing financial concept gaining traction, particularly in the realm of vacation property ownership. This approach involves multiple individuals pooling resources to collectively purchase a property and then dividing ownership into shares or fractions. The concept's roots trace back to the world of affluent consumers seeking ownership of private jets, pooling resources to share the financial burden and benefits. By the mid-1990s, fractional ownership transitioned into real estate, becoming a viable option for owning vacation properties.
Key aspects of fractional mortgages include:
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Collective Ownership: Groups comprising family, friends, or business partners collaborate to purchase the property together, sharing costs and benefits.
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Fractional Division: The property's ownership is divided into shares, allowing each participant an allocated portion.
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Management by Entities: Major players in this market often include hotel chains or similar entities experienced in vacations and lodging. They handle unit management and sell shares at premiums, pocketing profits while managing maintenance.
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Costs and Renting: Initial costs for fractional ownership are notably higher than conventional timeshares, typically starting at $150,000 or more. Maintenance fees are also steep. Owners often offset costs by renting out their allocated time.
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Usage and Transfer: Each owner typically gets an equal number of days annually to use the property. Fractional ownership homes can be rented, sold, or passed down as inheritance.
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Limited Mortgage Availability: Lenders are generally hesitant to provide fractional mortgages due to complexities in foreclosure if one participant defaults. Therefore, most fractional mortgages are offered by builders or developers involved in the property.
The appeal lies in providing individuals who desire a vacation home but won't use it extensively throughout the year with a practical and financially feasible solution. It allows access to a second home without the full financial burden, providing a balance between ownership and cost-effectiveness.
This concept contrasts with conventional timeshares, offering a more significant stake in the property, albeit at a higher initial cost and with more substantial responsibilities for maintenance and fees.
Fractional mortgages, as detailed in Dan Rafter's article, cater to a specific niche seeking vacation property ownership with shared financial responsibility. This concept is part of the evolving landscape of real estate financing, catering to the varied needs of buyers and investors in the market.
Other related articles in the realm of mortgages and real estate finance delve into different aspects of property ownership, such as refinancing, preapproval for home loans, unique considerations for condo mortgages, and specific guides for individuals with disabilities seeking mortgage assistance. These articles cater to a wide range of audiences and needs within the real estate financing domain.
