Home sweet (second) home: How to finance a vacation property

When Graham Gullans purchased his vacation home in Chatham last year, he knew upfront he would finance it with a mortgage. “Mortgage rates were so low that they offered a really compelling reason to buy a second home,” said the 37-year-old tech company executive, whose primary residence is in Boston.

Gullans locked in a 2.75 percent mortgage to purchase the property, which consists of a main house and a separate carriage house totaling four bedrooms and five baths, for $1,176,000.

Today, however, deciding how to pay for a vacation home may be more challenging. According to Freddie Mac, a 30-year fixed-rate mortgage averaged 5.25 percent as of May 19, up from 3 percent one year earlier. Higher interest rates, which translate into higher mortgage payments, cut into the purchasing power of a vacation home buyer. Plus, with limited inventory and strong buyer demand, the market is more competitive than ever, so some shoppers are becoming more creative to nab that perfect weekend place.

“The local residential market is very competitive, so people are doing things a bit differently,” said Mary Mullin, a wealth management adviser for Merrill Lynch Wealth Management in Boston. “Ideally, you want to go in with a cash offer.”

Mullin said that in the past, if someone owned a home in Boston or the suburbs and wanted to buy a house on the Cape, they would do a cash-out refinance. But despite the fact that tappable equity — the amount homeowners can access while retaining at…