– Refi Guide –
For people who are lucky enough to have a second home, you will always have some unique challenges. One of the issues that can come up at some point is refinancing the second house.
If you are seeking to refinance a second home that you occupy, then you will likely receive a competitive interest rate that is lower than it would be if you did not occupy the property.
If you want to refinance a vacation home then your timing is good, because market rates are affordable and credit standards are more flexible than they have been in the past on 2nd home loans.
There are many companies that offer mortgages to refinance a second home, but many of these companies will charge a premium. In many instances you do not have to pay significantly higher interest rates when refinancing a second home, but you have to find the lenders that do the volumes of these higher risk loan products.
Underwriters typically require more equity when evaluating an application to refinance an investment property. They consider an investment property a higher risk, mostly because the default rate is higher. This can also translate to a higher interest rate. So with that being said it is very important to determine whether you are trying to refinance an owner-occupied 2nd home or an investment property prior to submitting an application with a mortgage company.
Recent years have been a good opportunity to refinance a second home because mortgage rates have rarely been lower. However, there are some other things to know about to get the best deal when you are doing a refinance on a second home:
#1 Check Your Equity
Many financial experts advise on focusing on how much equity you have in the second home, rather than interest rates. These days, you can still get a mortgage for 4% or less if you have good credit. However, for a second home, the amount of equity in the property is often more important than rate.
If you have more equity, you are more likely to be able to refinance it. But if you owe more on the home than it is worth, you will not be able to refinance it in most cases. You can however try to refinance the property through the US government’s HARP program. It was designed with underwater homeowners in mind.
#2 Get a Fixed Rate
Many experts advise a fixed rate on a second home so you never need to worry about interest rates going up. Remember that the rates for a second home are usually at least .50 higher than the rates on a primary home.
You also need to be sure that the home qualifies as a second home or you can get hit with a penalty when you go to refinance. This means usually that the home has to be a certain distance from your main home. In most cases, your second home has to be at least 50 miles from your first home.
Also, the second home must be used by you and family for at least 14 days per year. Once you can establish that this house is a second home, you will be able to qualify for the best interest rates for second homes.
#3 Improve Your Credit Score
It is easier to get a second home refinance today than it was five years ago, but credit standards have tightened up a good deal. To get yourself the best rates and to make sure that you can refinance your second home at all, you should have a credit score of at least 680.
Also, be certain that your debt to income ratio is under 42%. These tips are the most important things to remember if you are refinancing your second home.
Should You Own a Second Home?
But if you are still considering getting a second home at all, we think you should think about it very carefully. For certain people, having two homes can make a lot of sense. Below are some considerations if you are weighing the purchase of a second home:
- You need cash reserves. You need not be in the top 1% of the US to do it, but if you want to get a mortgage for a second home, you need to show the bank that you have plenty of cash. Underwriters want to see that you have at least six months of payment reserves for both properties before the loan will be approved.
- You will generally need to put at least 20% down for your second home, and it could be more.
- Your debt load must be reasonable. You will have to take on a lot more debt to get another home, and lenders will be watching that debt load carefully. Usually, the DTI level will be the top issue for the underwriter. You do not want your total debt to go above 42% of your total income. One way to increase your income and lower the DTI ratio is to rent out the property when you are not there.
- Renting out a property does not always work out. There are cases where the second home could sit empty for much of the year when you are not there. If you were depending upon that income to make your mortgage payments, you could have problems.
- Be prepared for the worst if you rent it out. Whether it is a high end or low end second home, if you rent the property out when you are not there, things can and will go wrong. People regardless of income level will not maintain a rental property like they will their own, so you want to have a lot of cash reserves to deal with any unforeseen problems. Some serious problems can unfold from sloppy renters and the resulting damages can go far beyond the security deposit.
The Bottom Line
Owning a second home can be a great opportunity to have your own vacation spot which you also may be able to rent out when you are not there. If you want to refinance your second home, remember the above tips to get the lowest possible rate.
If you are still thinking about getting a second home, be sure you do your financial homework to be sure that it really is a good idea. You do not want to own a second home if you are going to be financially stretched to maintain it. But if you have the finances, it can be a great way to get the most out of life.