Can I Get a Home Equity Loan on a 2nd Home, Vacation House or Rental Property?

Home prices are still rising in 2022, with one major house price indicator at S&P finding prices up 19% from January 2021. This is a blistering pace, especially when you consider this growth was on top of an 11% rise that was reported at the beginning of 2021. Because of rising home equity, millions of homeowners wonder what they should do with their new-found wealth. On average, the typical homeowner gained more than $25,000 in equity in just 2020.

One option for that cash is to pull out equity. But if you already own a 2nd home, vacation home, or rental property, you also may be able to pull that cash out.

But with mortgage rates recently topping 5% for new and refinanced mortgages, you may not want to pull cash out with a refinance. The new home equity loan guidelines have eased credit and equity requirements, so homeowners can once again consider an equity loan.

Instead, consider getting a home equity loan on your second home or vacation property. Now could be the perfect time because fixed rates for home equity loans are still much lower than for credit cards or personal loans.

Why Get a Home Equity Loan on A 2nd Home?

Some homeowners like the idea of taking cash out of a second home. That way, you are not removing equity from your primary residence. Using the vacation home or rental property for the home equity loan reduces the chances of being underwater on your property.

Luckily, many lenders these days offer home equity loans and other 2nd mortgages on second homes. Getting the loan may be more complex than if you attempt to refinance a home that you don’t live in. But that doesn’t mean it’s impossible to enjoy the low interest rates of a home equity loan! You can!

What Are the Rules for A Home Equity Loan on A Second Home?

Taking out a loan on a second home, vacation home, or rental property you don’t reside in is a higher risk for the lender. So, you should expect a higher interest rate and stricter lending rules for your home equity loan.  But no worries – with enough planning, you will be able to qualify for your second mortgage.

Typically, getting a home equity loan on a second home requires putting down at least 10 percent. More is better because you will get a lower interest rate. That doesn’t affect getting a home equity loan on the home, but just FYI!

Also, you probably need to leave 25% or more of the equity in the second home. That means you need quite a bit more equity than 25% to make the home equity loan worth doing.

Credit score requirements are also higher for second homes and the DTI limits are stricter.

More on requirements for the home equity loan for a second home:

  • You need to own the property for at least a year
  • Credit score of approximately 680 to 700
  • Larger down payment and a lower home to value ratio or LTV
  • Restrictions on where the property is located

While there are stricter requirements, you’ll be happy to know getting a second mortgage on a second home is easier than for rental property. So, you should be able to find lenders offering more 2nd mortgages on the vacation home if you have one.

What About a Cash-Out Refinance?

There are stricter requirements, but you don’t have to necessarily be locked into one type of loan to get access to the cash you want. You also could consider a home equity line of credit or a cash-out refinance. Which loan option is best depends on your situation and financial goals.

Consider A Second Mortgage If…

As we explained earlier, first mortgage rates for new purchases and refinances are higher than they have been in several years. With rates recently exceeding 5%, you may not want to refinance your second home to pull out cash.

It is probably better in this rate environment to get a home equity line or HELOC to pull out your money.

Also, a home equity loan doesn’t require you to restart the payment period and increase how long you pay your mortgage. This also extends how long you pay interest, which could save you thousands of dollars over the long term.

Whether you should get a home equity line or HELOC depends on several factors. Let’s take a look:

  • Get a home equity loan if you prefer taking a large chunk of equity out of the second home at one time. You will pay the money back at a fixed interest rate over a set period, usually 20 or 30 years.
  • Consider a home equity line of credit if you want to pull the money out over time. You can access as much as you want up to your credit line at any time. Also, repay the money over time and the credit line can be accessed again, just like a credit card. You have an interest only draw period, then a repayment period paying principal and interest.

Whether you get a home equity loan or HELOC, you will have two monthly payments, so make sure you have the money and organization to make that happen.

Why Are There Different Lending Rules for 2nd Homes?

If you were buying and selling real estate before 2008, you probably remember it was easier to pull cash out of first homes and even second homes. But after the mortgage crash of 2008 and 2009, lenders realized lending guidelines were lax and that led to too many defaults.

Instead of getting a second mortgage with 100% or even 105% (!) of your home’s equity with loose credit rules, lenders weren’t even offering second mortgages on second residences. Unlike your primary home, home loans for second homes are a higher risk for the lender.

Also, second mortgages are always a higher risk for the lender. This is because the loans are in the ‘2nd lien’ position, meaning they may get paid less or slower if you default. For these reasons are why getting a 2nd mortgage on a second home is more difficult today.  And you will pay a higher interest rate.

The Bottom Line

If you already own a second home and want to access equity to pay for a major expense, you may be able to do so with a second mortgage. There are more credit requirements and stricter lending rules, but you can still access the cash you need with a second mortgage on your second home. So, speak to your mortgage lender today to find out more information!