Refinancing Your Second Home: Considerations and More
Has your credit score or income increased after purchasing your second home? If this is the case, you may be paying more than you need to on that second mortgage. Have you considered refinancing your property at a lower rate? While people often focus on refinancing a primary residence, refinancing a second home is a similar process, and it can be just as worthwhile financially.
What Are the Benefits of Refinancing?
Refinancing makes sense when you're offered a better interest rate than what you're currently paying. By refinancing to a better rate, you save on interest over the life of the loan. Other good reasons to refinance are to get a lower monthly payment, to give yourself more time to pay off the mortgage, or to take some cash out of your equity in the home. Refinancing can free up funds to make repairs or upgrades to your home, or to use for other financial goals.
How Refinancing Works
To refinance any property, you apply for a new loan that's used to pay off your previous mortgage. You may choose a cash-out mortgage, in which case you borrow more than what you currently owe. For example, if you owe $50,000 on a home worth $180,000 and you refinance with a $60,000 mortgage, $50,000 goes to pay off your previous mortgage, and you receive $10,000 in cash.
In your application, submit proof of income going back at least a couple of years, and be sure to have the property appraised. When determining the interest rate, the lender considers factors such as how much equity you have in the home, your credit score, your income and ability to pay the mortgage, and the property's value. After you select a refinance offer, your lender will determine your eligibility and if you are approved, you will close on the loan thereafter.
Refinancing Your Second Home vs. Your Primary Home
Refinancing a second home is a bit more involved than refinancing a primary residence, and the requirements for borrowers are generally more strict. Lenders usually require a lower loan-to-value ratio for refinancing a second home — the amount you can borrow is limited to a smaller portion of the home's value. Therefore, you'll need more equity in a second home to be able to refinance. They may also ask you to show that you have enough cash to cover at least two mortgage payments, or more if you have mortgages on other homes. You may also need a higher credit score to qualify for a mortgage on a second home.
The interest rate on your second home may also depend on whether or not you keep the second home solely for your own use or if you decide to rent it out. If you don't rent out the second home, your rate might be only slightly higher than what you'd pay on a primary home mortgage. In this case, you might be asked to demonstrate that you spend some time in the second home each year and that you don't have tenants living there.
If you do have tenants, you'll need to provide evidence of their on-time rental payments, and your lender will evaluate whether this rental income is sufficient to assist you in qualifying for the mortgage. The lender may also require that you have more cash available to pay the mortgage. For example, you might be asked to show proof of ability to make six months of mortgage payments rather than two. Plan on paying higher expenses to refinance an investment property that you don’t occupy. You may be charged a higher appraisal fee for a rental property, and you can likely expect to pay a higher interest rate than you would on a vacation home used only by you and your family.
If it's been a few years since you've taken out a mortgage on your second home, don't assume that you get the best rate possible from the status quo. Refinancing may give you better terms and greater flexibility. Speak to a mortgage loan officer to learn more about this option.