Second homes arent only for rich people. They have become mainstream, whether theyre used for vacations or for rental income. 

More than 9 million dwellings in this country are second or third homes, accounting for about 6 percent of residential sales. Three-quarters are considered vacation homes and the rest are investment properties or undeveloped land, according to a survey by the National Association of Realtors.

You dont have to have a pile of cash on hand to buy a vacation house. You can use the equity in your primary residence to help pay for a second (or third) home. Make sure you ex-plain to your lender what youre doing, and you might want to consult with a tax adviser, too.

Many variables.

Its not always easy to identify the cheapest cost of borrowing, and that explains why communication is so important. The lender needs to know which house will be your primary residence and which will be secondary. In most cases, you will find that the interest rate on an owner-occupied home will be about three-eighths of a percentage point lower than for a nonowner-occupied house. With todays low rates, that means you might be able to get a loan for 5.5 percent on your primary residence and have to pay 5.875 percent on the loan for the second home.

Equity is equity.

If you have a lot of equity in your primary residence and you want to buy a vacation home, it might make sense to refinance the mortgage on the primary home for more than the current loan balance. Thats called a cash-out refi because you borrow more than the current balance, pay off the current loan and get the remainder in cash. You can use the cash extracted from your primary homes equity to make a down pay-ment on your second home, or even to buy it outright.

For some homeowners, the cheapest cost of borrowing isnt only about borrowing as much as possible at the lowest interest rate. Its also about taking advantage of tax deductibility.

Take, for example, a newly married couple in which both spouses come into the marriage owning their own homes. They want to keep both houses renting them out and buy a third house as their primary residence.

Tax deduction limits.

If the owners must refinance, they move into complex territory. They want to maximize the size of the mortgage on their primary residence to take advantage of a lower rate and tax deductibility, while refinancing the loans on the other two houses. This can require delicate timing, if only to ensure that they qualify for all the loans.

The cash-out refi shuffle.

There is also the sensitive matter of staying within the letter, if not the spirit, of the loan documents by engaging in creative timing. In some cases, it might be possible to do a cash-out refi while the house is still considered the primary residence, wait a year, then rent out the home, without having to refinance again at a higher investment-property rate.

A cash-out refinance isnt the only way to extract equity to buy a second house. You also can use money from a home equity loan or equity line of credit. Rates on lines of credit usually are below rates on fixed-rate mortgages.

The downside is that the rate on the line of credit is tied to the prime rate and can rise.

2004 bankrate.com