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It goes a little bit like this: You’re on a much-needed vacation with your family, having daiquiris on the beach while the kids have the time of their lives playing in the surf. Everybody is happy— you want to come back here every summer.

Then, a timeshare salesman approaches you in the resort lobby and offers you a free three-course dinner at a top restaurant in exchange for hearing out his pitch: a timeshare on this very beach, a great investment opportunity, and a deal that’s on the table for one day only.

The high-pressure timeshare salesman has become a cliché of resort towns everywhere, and with good reason. The timeshare loans they sign vacationers up for often have a high rate of default. But timeshares are still a popular way to vacation, and there are savvy ways to finance a timeshare. In fact, according to the American Resort Development Association (ARDA), 9.2 million U.S households own a timeshare. And some even own several timeshares.

So, are timeshares a good idea? It depends on how you think about it. If you’re looking for a vacation spot you can use whenever you want, you are likely in for an expensive disappointment. But if you’re looking for a vacation spot you can come back to time and again in your favorite location, it might make financial sense.

Staying in resorts and eating out can get expensive. Buying a vacation home can be even more expensive. If you understand that you’re purchasing a timeshare not as an investment but as a vacation experience—to spend time in with family and friends, it may actually be less costly and less stressful than other vacation options.

While purchasing a timeshare comes with risks, there are ways to be smart about timeshare financing. In this article, we’ll walk you through some timeshare financing options, so you can understand how it works and make a decision that’s right for your budget.

How to Finance a Timeshare Responsibly

When you buy a home, you typically finance it with a mortgage. When you buy a car, you can finance it with an auto loan. But there’s no direct lending market for timeshares, and on top of that, they usually don’t increase in value over time.

So what are your timeshare financing options? First, let’s look at how not to finance a timeshare. The first option most interested buyers are faced with is developer financing. Typically, a timeshare resort developer works with a lender that offers high-interest personal loans, and they encourage you to make a decision right away while you’re at the presentations. According to ARDA, buyers pay an average of $20,000 for a timeshare interval, though prices can range from depending on the property.

Developer financing is often proposed as the only timeshare financing option, especially if you buy while you’re on vacation. Another option, however, is to plan ahead. If you’re ready to purchase a timeshare, secure financing beforehand so that you have the funds in hand when you negotiate the sale. This way you have time to shop around for a good financing deal—and possibly save up some money to put toward the purchase as well.

Choosing a Vacation Home

When you purchase a timeshare, you’re sharing the property with a number of other timeshare owners and typically have the right to use the property at the same time every year.

You can trade days with other owners and sometimes even try out other properties around the country (or around the world) in a trade. In addition to the initial purchase price, you’ll also be required to pay your share of the maintenance fees that cover the costs of property upkeep and cleaning. These maintenance fees often increase over time.

Once you’ve considered the financial responsibilities that come with the timeshare and your budget, choosing the right place often comes down to where you want to be, and what you need in terms of space and amenities.

Since selling a timeshare can be difficult and sometimes involve a financial loss, you’ll want to make sure you’re purchasing a timeshare in a place that your family will want to return to for a long time—and can easily get to. That way you don’t end up paying for a place you don’t use.

Preparing Financially for a Timeshare

A good financial scenario to be in when buying a timeshare is to have a steady income that will allow you to keep up with maintenance fees and travel to your timeshare each year. If you plan to finance the purchase, look over your financial profile and creditworthiness.

Your income, creditworthiness, the term of the loan and other factors, will determine the rates that lenders will offer you. Resolving any issues impacting your credit score may help improve your financial profile.

You’ll also want to consider your budget over the next few years. Are there any other major purchases you are planning to take on? Do you anticipate a new added cost like a new family member? Any type of financial shift in coming years should be accounted for before you finally sign on.

Smarter Ways to Finance a Timeshare

There are a few alternatives to financing a timeshare with financing offered by a developer. Of course, you can wait and save up the cash to purchase the timeshare outright. If you’re looking to finance the purchase, there are still several good options.

One option is to use a current credit card. This option often involves less paperwork, but does come with a high cost in terms of interest rates. This option should be used if you are putting most of the purchase price down in cash up front and just need to put the last little bit on a credit card. You should also only do this if you are certain you can pay off the remainder in a relatively short amount of time.

Taking out a home equity loan is another option. With a home equity loan, you are borrowing money against the value of your home. These loans can be relatively easy to secure from a lender, because your home is often used as collateral.

They also come with potentially much lower rates than other types of loans . There are a few drawbacks, however: There’s more red-tape and risk as you’re putting your home on the line. Home equity loans are typically used for expenses or investments that will improve the resale value of your primary residence.

Securing a personal loan at a competitive interest rate can be an even better solution for financing a timeshare. Depending on your financial profile, you may qualify for a much lower interest rate than financing from a developer or a high interest rate credit card would offer. A personal loan also allows you to choose terms that work for you. On top of that, a personal loan is relatively easy to secure.

Timeshares are often thought of as a way to guarantee vacation time in your favorite location each year without having to buy a second home. If you do your homework and weigh the risks, they can be a good way to vacation with family and friends and make a lot of memories along the way.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit.

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Thinking of buying a home this year? With interest rates, rents and housing prices all on the rise, this could be an opportune time to make it happen – and an interest-only mortgage loan might be the thing that makes it possible.

How Does it Work?

While not for everyone, an interest-only mortgage offers a host of advantages for some borrowers. As the name suggests, these loans allow you to pay only the accrued interest on the loan each month for a period ranging from 5 to 10 years.

Because you make lower monthly payments during this timeframe, you enjoy increased financial flexibility (meaning you can invest the difference or choose to pay principal in conjunction with a bonus or other cash influx).

After the interest-only period expires, the loan converts to a more standard structure where both principal and interest are paid on a monthly basis. At this point, you’ll see your mortgage payment go up – sometimes substantially.

Because of this, interest-only loans are typically better for borrowers who expect to be able to cover those higher payments in the future – for example, if you believe your income will increase before the interest-only period is up.

A Checkered Past

Interest-only mortgages have been around for decades, but for the most part they weren’t attractive to the masses. Typical borrowers were often affluent homeowners who viewed their homes as part of an investment portfolio: interest-only mortgages provided the opportunity to seek better returns with the capital that would otherwise have been used to make a higher mortgage payment.

Then came the housing bubble of 2004 – 2006, when lenders started approving interest-only loans for unqualified borrowers who wanted to keep mortgage payments low while trying to flip houses as quickly as possible.

After the bubble burst in 2008, the market for interest-only loans went dormant for several years – and these products were left with a less-than-favorable reputation.

The Opportunity Today

Between the current economic environment and the advent of new interest-only loan products, this type of loan is once again worth considering for some borrowers.

Again, the main stipulation is that you’re not biting off more than you can chew – meaning you expect to be able to handle the increase in payments once the interest-only period is up.

If you meet those criteria, here are a few advantages to consider:

1. Lower Upfront Monthly Payments

Because you only pay the interest that is accruing on the mortgage, initial monthly payments are substantially lower than if you were also paying the principal.

For example, on a $1 million, 30-year, 4% fixed mortgage, the initial monthly payment would be $4,774 – with about $1,440 of that going to principal. On an interest-only mortgage with the same criteria, the monthly payment would be $3,333.

2. Tax-Deductible Payments

Generally speaking, you can deduct 100 percent of your interest-only mortgage payments,as long as the total deduction is on debt less than $1 million.

On the other hand, mortgage payments that include payments on both principal and interest are only deductible for the amount of interest paid. In the example above, for each month’s payment of $4,774, only the interest portion ($3,333) would be deductible.

3. Rent vs. Own

As rents continue to skyrocket in metropolitan areas, many people would rather put that monthly check toward a home of their own. For example, the median monthly rent for a one-bedroom apartment in San Francisco is about $3,500.

With interest-only mortgage rates currently hovering around 4 percent, payments on a $1 million mortgage would be less than the cost of renting. Factor in the tax deduction benefit, and buying a home becomes even more attractive.

4. Seek Higher Returns

There are situations where paying down the balance of a mortgage may not be the most efficient use of capital, specifically when funds can be allocated to higher-yielding investments.

Much like the savvy borrowers in the early days of interest-only loans, you can take advantage of the flexibility afforded by lower mortgage payments to seek investments with higher returns. This advantage makes an interest-only mortgage a compelling choice for long-term wealth building.

The Takeaway

Forecasts for 2016 and beyond include rising interest rates, increasing housing prices and the continuing escalation of the cost to rent.

These factors make 2016 look like an opportune time to buy a home. If the structure of a traditional mortgage has prevented you from buying a home, an interest-only mortgage may provide a solution that helps make that happen in the near future.

Download the SoFi Guide to First Time Home Buying to get valuable tips on these topics and more. Our guide also demystifies modern mortgage myths around down payments, the pre-approval process, student loans, rising interest rates, and more.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Mortgages not available in all states. Products and terms may vary from those advertised on this site. See sofi.com/eligibility-criteria for details.

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