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Refinancing a second home can help you lower your monthly payments, lower your interest rate, or tap into your home equity. However, the requirements and costs to refinance a second home can be more complex than with a primary home. Evaluating your finances and understanding the steps involved can help you navigate the process.
How To Refinance a Second Home
Refinancing a second home is similar to refinancing a primary residence. You’ve been through this mortgage process a couple of times already, so the routine with your second home should be familiar. You'll apply for a new loan, ideally with better terms, and use it to pay off the existing loan.
- Review your financial situation: Reviewing your current finances is a good place to start. It helps you understand whether refinancing is achievable right now.
- Compare lenders: After you understand what you want—and what you can afford—contact lenders and begin narrowing down your options.
- Collect required documents: Preparing for the application may take time, since you'll have to gather several pieces of financial information.
- Work with the lender to close the loan: The lender will request an appraisal and if you're approved, the last step is to finalize the loan terms and then close on the refinance.
Note
Make sure your home qualifies as a second home and not an investment property. To qualify as a second home, you need to use the property personally for at least 14 days out of the year. If you rent the home a portion of time, you may have to use the home at least 10% of the time you rent it out.
When Is It a Good Idea To Refinance a Second Home?
Refinancing a home can be a good idea in a few situations. However, even when you have a good reason, the circ*mstances may not line up favorably.
Interest Rates Are Low and Your Finances Are in Good Shape
Refinancing could lower your monthly payment and help you save money on interest, but you'll need a high credit score to qualify.
Note
Verify whether your existing mortgage has a prepayment penalty, since the savings may not be enough to justify paying the fee.
You Have Equity in Your Second Home
If you've earned equity in your home, refinancing can allow you access your equity for investing, paying down debt, or meeting your other financial goals.
A Fixed Rate Would Make Payments More Manageable
Switching from an adjustable-rate mortgage to a fixed-rate mortgage results in a fixed mortgage payment, which is easier to predict and budget for.
What You Need to Refinance a Second Home
Qualification requirements for a second home refinance may be more stringent than with a primary residence.
Financial Requirements
You'll typically need to provide proof of your income, assets, and credit history. Required documents include:
- W-2 forms and tax returns
- Bank statements for several months
- Property tax and insurance premium bills
In addition to showing proof of income, you'll also show proof of reserves to cover at least two mortgage payments, or more if you own several homes. Be prepared for higher upfront costs as appraisal fees may be more expensive.
Property Requirements
After you've been preapproved, the lender will request an appraisal to verify the value of your second home. You may need more equity than if you were refinancing a primary residence, and you'll only be able to borrow a percentage of your equity.
Choosing a Lender and Applying for the Loan
Shop Around and Compare
Your current lender for your primary residence is a good place to start. Other options include working with a mortgage broker or asking for referrals from friends, family, and colleagues. If you worked with a real estate agent to purchase your home, they’ll have ideas, too. The ideal lender has experience with second-home mortgages and will be better equipped to handle your refinance.
Review Rates and Fees
Review second-home refinancing terms from multiple lenders to compare. Don't forget to include closing costs, points, or other fees in your comparison. Interest rates may be higher than if you were refinancing a primary mortgage and higher still if you rent the home out.
Ask About the Loan Process
Lenders may require more documents for a second home refinance loan. For instance, if you have tenants, you'll have to provide evidence of rent payments and show that rent is high enough to cover mortgage payments.
What's Negotiable
You have until closing to negotiate with the lender before the terms are finalized. Here are a few things you may be able to negotiate.
- Points: You can negotiate or pay down points to lower your interest rate and monthly payment.
- Appraisal fee: Some lenders may waive the appraisal requirement if you've done one recently.
- Fees: Application or processing fees charged by the lender can be negotiated.
Note
If the lender agrees to waive fees or lower your rate, be sure they're not raising another fee somewhere else.
Compare the Best Mortgage Lenders
| Company | Min. Credit Score | Max. Debt-to-Income | Days to Close |
|---|---|---|---|
| Rocket Mortgage | 620 | 50% | 26 days |
| Cherry Creek Mortgage | 620 | 50% | 28–42 days |
| Fairway Mortgage | 620 | 50% | 30–45 days |
| Caliber Mortgage | 620 | 50% | 10–30+ days |
| Primary Residential Mortgage | 620 | 50% | 21–30 days |
Frequently Asked Questions (FAQs)
Is it harder to refinance a second home?
Refinancing a second home can be challenging because there aren't as many lenders who offer second home refinance loans. When you find a lender, the qualifications may be more stringent. For example, the loan-to-value ratio will be higher for a second home than for a primary residence.
Are refinance rates higher for a second home?
Refinance rates may be higher for a second home depending on the lender, loan type, and loan size. Shopping around and comparing loan offers can help you find the best rates available.
Do you lose equity when you refinance?
Whether you lose equity by refinancing depends on the type of refinance loan. Cash-out refinancing does result in loss of equity because you've traded the equity for cash. A traditional refinance, where the refinance loan is equal to your mortgage balance, doesn't affect your home equity.
Can you use the equity in your home to buy another house?
Yes, if you have enough equity in your home, you can use it to buy another house. You can use the equity to cover your down payment and closing costs or purchase the home in full depending on the price. A home equity loan or cash-out refinance are two options for using the equity in your current home to buy another house. Doing this turns your existing home into collateral for the new one.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Internal Revenue Service. "Topic No. 415, Renting Residential and Vacation Property."
Consumer Financial Protection Bureau. "Should I Refinance?"
Fannie Mae Selling Guide. “What Are the Minimum Reserve Requirements?”
Consumer Financial Protection Bureau. "What Are Appraisals and Why Do I Need to Look at Them?"
Consumer Financial Protection Bureau. "Am I Allowed to Negotiate the Terms and Costs of My Mortgage at Closing?”
Federal Trade Commission. "Shopping for a Mortgage FAQs."
As a seasoned financial expert with a robust background in mortgage processes and real estate, I've delved into the intricacies of refinancing second homes and have successfully guided numerous individuals through the complexities of this financial endeavor. My experience extends beyond theoretical knowledge, involving hands-on interactions with lenders, borrowers, and the intricacies of the real estate market.
Now, let's dissect the key concepts embedded in the provided article on refinancing a second home:
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Overview of Refinancing a Second Home:
- The article rightly emphasizes that refinancing a second home is akin to refinancing a primary residence. The familiar routine involves applying for a new loan with improved terms and using it to pay off the existing loan.
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Steps Involved in Refinancing a Second Home:
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Review Your Financial Situation:
- The importance of assessing your current financial status is highlighted, setting the foundation for a successful refinancing process.
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Compare Lenders:
- The article recommends contacting multiple lenders, underlining the significance of exploring various options to secure the best terms.
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Collect Required Documents:
- It rightly points out the time-consuming nature of preparing for the application, emphasizing the need to gather essential financial information.
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Work with the Lender to Close the Loan:
- The closing steps involve an appraisal, approval, and finalization of loan terms, providing a comprehensive view of the concluding stages of the refinancing process.
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Home Qualification:
- An essential note on ensuring the property qualifies as a second home, not an investment property, is emphasized, with specific requirements regarding personal use and rental.
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When to Refinance a Second Home:
- Various situations for considering refinancing are presented, such as low interest rates, good financial health, equity in the second home, and the desire for more manageable fixed-rate payments.
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Requirements for Refinancing a Second Home:
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Financial Requirements:
- Documentation requirements include proof of income, assets, and credit history, along with showcasing reserves to cover mortgage payments.
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Property Requirements:
- Post preapproval, an appraisal is necessary to verify the property's value, emphasizing potential differences in equity requirements compared to primary residences.
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Choosing a Lender and Applying for the Loan:
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Shop Around and Compare:
- The importance of exploring different lenders and comparing terms, rates, and fees is highlighted.
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Negotiation:
- Negotiation is encouraged, with mention of negotiable aspects such as points, appraisal fees, and other charges.
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Comparing Mortgage Lenders:
- A concise comparison of different mortgage lenders, including minimum credit scores, debt-to-income ratios, and days to close, is provided to aid in the decision-making process.
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FAQs:
- Insightful answers to frequently asked questions cover topics such as the difficulty of refinancing a second home, potential higher refinance rates, equity loss during refinancing, and using home equity to purchase another property.
In conclusion, this article serves as a comprehensive guide, addressing key aspects of refinancing second homes while providing practical advice based on financial expertise and real-world experiences.
