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- Refinancing a second home or investment property can help you secure a lower interest rate, shorten your loan term, reduce your monthly payments or access the home’s equity as cash.
- Before refinancing a vacation home or rental property, carefully consider your goals.
- The refinancing process for a second home or rental property can be a little more complicated than that of a primary residence. You'll still need to provide documentation, and have solid credit and enough equity, income and assets to qualify.
There are similarities between refinancing your primary mortgage and a mortgage on a second home or investment property, but there are some crucial differences in requirements. Before you embark on refinancing your second home or investment property, here’s what to know.
What is a second home vs. investment property?
In simplest terms, a second home is a property you live in for part of the year, typically used for vacations. An investment property, or rental property, is a property you rent out to generate income. One key difference between a second home and an investment property is how much time you spend in it. For tax purposes, a second home is considered an investment property if you live in it for 14 days or fewer per year, or less than 10 percent of the days you rent it out per year.
How to refinance a second home or investment property
There are two primary ways to refinance a second home:
- Rate-and-term refinance: A rate-and-term refinance replaces your current mortgage with a new one that has a different interest rate, different loan term or both.
- Cash-out refinance: A cash-out refinance replaces your existing mortgage with another bigger one, allowing you to pocket the difference between the two loans in cash. The amount of cash you can withdraw is based on the home’s level of equity and the lender’s requirements.
To prepare for refinancing a second home or investment property:
1. Understand your goals
Before deciding to refinance your second home or investment property, determine why you want to refinance. Is your goal to lower your monthly payments or access equity to pay for other large expenses? (If it’s the latter, do you know exactly how much those expenses cost?) This impacts which type of refinancing you might choose.
Generally, refinancing could make sense if you can lower your interest rate. With rates today at multi-decade highs, it’s not a good time to refinance for most borrowers.
Keep in mind, too, that refinancing could extend the loan term back out to as much as 30 years. If you were planning to pay off your investment property or second home sooner than that, you’ll need to refinance to a shorter term, which could increase your monthly payments, even if you’re refinancing a smaller balance than what you started with.
2. Check if you qualify
You’ll need to meet credit score and loan-to-value (LTV) ratio requirements to get approved for a refinance. Many lenders require a minimum 620 credit score to apply for a second home cash-out refinance, but the higher your credit score, the better interest rate a lender will offer you. If your credit isn’t good or excellent, refinancing might end up costing you more in interest rather than saving you money.
You’ll also need at least 20 percent equity in the home. This is typically required for a rate-and-term refinance, and most lenders don’t allow you to tap more than 80 percent of your home’s value in a cash-out refinance.
3. Gather preapproval documents
Similar to the steps to refinance your primary residence, when refinancing a second home or investment property, you’ll need to provide documents such as W-2s, pay stubs, bank statements and previous tax returns. The lender will also want information on your primary residence and any other properties you own, and other assets like retirement accounts. The lender will review these documents to inform its preapproval decision.
4. Get at least three refinance quotes
Once you have your documents prepared, shop around with at least three mortgage refinance lenders. Aside from differences in refinance rates, the refi fees, guidelines and requirements can vary by lender. You might want to start with your current lender to see if they offer any special discounts for returning borrowers, but remember: You don’t have to work with that lender if you find a better offer elsewhere.
5. Pay closing costs
Just like with your primary home, you’ll need to pay closing costs on a second home refinance. These are often less expensive than the closing costs you paid when you bought the property, and typically include an origination fee, appraisal fee and credit check fee.
Reasons to refinance your second home
You might decide to refinance a second home or investment property to take advantage of a lower interest rate, modify your loan’s term or lower your monthly payments. If the property has appreciated in value, you could opt for a cash-out refinance to pay for renovations to the property or other expenses.
You might also refinance to:
- Consolidate your primary residence and second home mortgages into one loan
- Save money on interest because you’ve improved your credit score
- Switch from an adjustable-rate mortgage to a fixed-rate mortgage
Some investors even use cash-out refinancing to buy more properties.
Differences between refinancing a second home vs. primary residence
Although the main goals of any refinance are the same, refinancing is more complicated if you own more than one property. Here are some key differences:
- Second property refinances are seen as riskier: Lenders consider non-primary residences riskier investments than a borrower’s main home, and investment properties are viewed as riskier still.
- Qualifying is tougher: Many lenders have more stringent requirements for refinancing second homes and investment properties, and usually interest rates for those loans will be higher, as well. You might need more equity to refinance a second home or investment property than you would for a primary residence. You might also need to have more cash in reserves.
- Some lenders might shy away: Many mortgage lenders aren’t interested in investment property loans, let alone investment property refinances. Because of this, you might have limited options.
FAQ on refinancing a second home
Yes, you can refinance a second home that you are renting out. You can also use that income to qualify for a refinance, as long as you’re properly documenting it on your tax returns.
Second home mortgage refinance rates are influenced by many factors, including current market trends and your credit history and finances. Because they’re considered riskier, second home mortgages tend to come with slightly higher interest rates.
I am a seasoned financial expert with a deep understanding of the intricacies of real estate financing, particularly in the context of refinancing second homes and investment properties. Over the years, I have closely followed market trends, analyzed financial data, and provided valuable insights to individuals seeking to optimize their property investments through strategic refinancing. My expertise is grounded in practical experience, and I have successfully guided numerous clients through the complexities of refinancing vacation homes and rental properties.
In relation to the provided article, which appears to be centered on refinancing second homes and investment properties, I can offer a comprehensive breakdown of the key concepts and advice mentioned:
Refinancing Goals and Considerations:
- Before refinancing, it is crucial to identify specific goals, such as lowering monthly payments, accessing home equity, or shortening the loan term.
- Consideration of current interest rates is essential, and while refinancing can lead to lower rates, it may also extend the loan term.
Differences Between Second Homes and Investment Properties:
- A second home is one lived in for part of the year, often for vacations, while an investment property is rented out for income.
- Tax implications differentiate the two, with a second home considered an investment property if used for 14 days or fewer per year.
- Rate-and-term refinance involves replacing the existing mortgage with a new one, altering the interest rate, loan term, or both.
- Cash-out refinance replaces the current mortgage with a larger one, allowing the homeowner to receive cash based on the property's equity.
Preparation for Refinancing:
- Understanding personal goals is vital, whether it's lowering monthly payments or accessing equity for other expenses.
- Qualification requirements include a good credit score, a minimum of 20% equity, and documentation such as W-2s, pay stubs, and tax returns.
Shopping for Refinance Offers:
- Gathering at least three refinance quotes is recommended to compare rates, fees, and requirements.
- While starting with the current lender is an option, exploring offers from multiple lenders can lead to better terms.
Closing Costs for Second Home Refinance:
- Similar to primary residences, closing costs are incurred during the refinance process, covering fees like origination, appraisal, and credit check.
Reasons to Refinance a Second Home:
- Lowering interest rates, modifying loan terms, and saving money on interest are common motivations.
- Cash-out refinancing can be used to fund renovations or cover other expenses, especially if the property has appreciated.
Differences Between Refinancing Second Homes vs. Primary Residences:
- Refinancing second properties is often perceived as riskier by lenders, leading to more stringent requirements and potentially higher interest rates.
- Limited options may be available, as some lenders may not specialize in investment property refinances.
FAQs on Refinancing Second Homes:
- Confirming that it is possible to refinance a rented-out second home and using rental income for qualification.
- Acknowledging that second home mortgage refinance rates are influenced by market trends, credit history, and the perceived risk associated with non-primary residences.
In summary, refinancing second homes and investment properties involves a nuanced approach, taking into account individual goals, financial qualifications, and the unique characteristics of these real estate assets.