When refinancing a second home, you will see a lot of familiar territory. Like refinancing your main home, a lender will look at your income, credit score, debts and home equity. Meanwhile, you’ll want to shop around by checking rates, including fees, from several lenders to get the best deal for your refi.
How to Refinance a Second Home
Like any mortgage, whether for a first or second home, a refi loan requires a borrower to go through several steps, including deciding whether a refi makes sense and, if so, to:
Make sure to meet financial requirements, such as a minimum credit score.
Provide an array of documents, including tax returns and bank statements.
Compare interest rates, fees, and other borrowing considerations at several lenders.
Choose a lender.
Submit a loan application.
Negotiate the interest rate, closing costs, and fees.
When Is It a Good Idea to Refinance a Second Home?
Several scenarios might lend themselves to refinancing a second home. Among them are:
You could use lower interest rates. If interest rates have fallen enough that you’d recoup all of your closing costs and other expenses in a lower interest rate mortgage, you might want to refinance your second home.
You need ready money. If you select a cash-out refinancing, you’ll be replacing the original mortgage with a larger one. The difference between the amount of the new mortgage, after you’ve paid the original mortgage and closing costs and other expenses that go into the new mortgage contract, goes to you in one payment.
You want to build equity more quickly. For example, perhaps you have a 30-year, fixed-rate mortgage for your second home. If you shift to a 15-year, fixed-rate mortgage, for example, you’ll build equity more quickly.
You’re looking to refinance from one type of loan into another. For instance, maybe you have an adjustable-rate mortgage (ARM) on your vacation home, but want a little bit more longe a 30-year, fixed-rate mortgage (if you have a 30-year, fixed-rate mortgage, you could extract some of the initially lower interest that comes with an ARM, as long as you don’t plan to sell the house any time in the next five years, or before the ARM adjusts upward into a higher interest rate).
The interest rates for refinancing a second home might be higher than for refinancing a primary residence, which is understandable as second home loans are riskier than loans for primary residences. Imagine a borrower has financial problems and might choose to make mortgage payments for the primary residence instead of the second home’s mortgage.
And just as situations could make refinancing a second home a good move, some situations make it a move that is quite terrible. These terrible situations include:
Your interest rate is favorable. If the interest rate on a refinance is higher than what you presently pay, refinancing shouldn’t make sense.
You have a prepayment penalty on your current mortgage. Some lenders charge a prepayment penalty when you pay off your mortgage early, including when you refinance your mortgage. In this case, it could end up costing more than it’s worth to refi.
You’re looking to sell your secondary home in a couple of years. If you plan to sell in the near term, the lower monthly payments you’d earn with a refi might not offset the closing costs and other expenses on the new mortgage.
You’ve had this particular mortgage for a good number of months. To the extent that you are paying on a mortgage, as you make the payments, you are replacing more and more of the principal with interest payments. To the extent that you pay off this interest and utterance, the principal is being paid off. Take out a refi loan, and you’ll be back to paying off more of the interest that you are every month in your payments than you will be principal. In short, you’d be building equity slower than you had been before.
Your house could be foreclosed. If you qualify for a lower interest rate with the refi but your monthly payments are larger, you may be making ends meet more leanly, and end up delinquent and in danger of having your second house foreclosed.
What You Need to Refinance a Second Home
Like any refi, any mortgage on a second home is subject to financial, documentary and property requirements.
Financial Requirements to Refinance a Second Home
Among the common financial requirements for a refi loan are:
Credit score: Required credit score to refinance a second home is higher than for your primary residence mortgage (usually 620).
Debt-to-income ratio: Traditionally, a lender will likely allow you to have a second home mortgage with a DTI (debt-to-income ratio; all of your monthly debt payments divided by your gross monthly income) of 45 per cent or less.
Cash reserves: Your lender might ask you to demonstrate that you have sufficient cash on hand to cover two (or perhaps more) mortgage payments.
A refi loan on a second home is likely to require a better qualification that a loan on a primary home. For example, a borrower on a second home refi loan can be required to have a higher credit rating than a borrower on a primary home refi loan.
Document Requirements to Refinance a Second Home
The typical document requirements for a refi loan include:
Tax returns, W-2 forms, pay stubs, and bank statements: These three documents tell a lender how much income you have coming in and how much cash you have on hand.
Transcript of a credit report: This gives you a very detailed record of where you stand with your credit rating; the credit specific to you at the time of the report; and any late payments or issues with your debt.
Home appraisal: A home appraisal frequently is required to obtain a refi loan.
Property Requirements to Refinance a Second Home
Among the general property requirements to refinance a second home are:
Home Equity: The lender is looking for the borrower to have home equity created with the refi loan closed of at least 20 per cent.
Loan-to-value ratio: In most cases for a regular refi on a second home, the maximum loan-to-value ratio (LTV) is 90 per cent; with cash-out refi, a lender will generally want a maximum LTV of 75 per cent. This ratio compares what you owe on your mortgage to the value of the home as appraised.
Tenure of ownership: a lender almost certainly won’t grant you cash-out refi if you own a subsequent home for six or 12 months, it depends on type of mortgage.
Choosing a Lender
Questions to ask when choosing a lender include:
What kinds of refi loans do you offer?
What do you need for a second home refi versus other mortgages?
How long will the approval process take?
What are the interest rates you offer for a refi loan?
Will I be able to lock in an interest rate?
What are your credit requirements?
How much would my closing costs be?
Which documents will you need from me?
What’s Negotiable
Things that can be negotiated when you get a refi loan include:
Interest rate
Closing costs
Loan application fees
Loan origination fees
Underwriting fees
Prepayment penalties
Compare the Best Mortgage Lenders
In November 2023, Bank of America agreed to pay a $12 million fine to the Consumer Financial Protection Bureau for not asking mortgage applicants their race, ethnicity and sex, and then claiming the applicants simply failed to provide that information. The government collects that information from lenders to determine whether certain groups are being unfairly denied home loans in what’s known as mortgage lending redlining. The money from the fine will go to a victim compensation fund.
What Is a Cash-Out Refinance?
With a cash-out refinance, you take out another mortgage that is larger than your original loan, and get the difference in your pocket. With the mortgage of Janice’s vacant rental house on a lot with some significant trees paid off, Janice still has the property’s entire $350,000 value in equity. A cash-out refinance would have allowed her to borrow some of that equity and tack that dollar amount onto the new mortgage.
How Much Equity Do You Need to Refinance a Second Home?
Traditional ‘standard’ refi loans from a lender would typically look for at least 10 per cent equity in the ‘subject property’ (as they call it), while the more scarce ‘cash-out refi’ loans, which allow you to take accrued equity as cash, would also require at least 25 per cent equity for different kinds of loans there are different equity requirements for Fannie Mae and Freddie Mac loans.
What are the Benefits of Refinancing a Second Home Mortgage?
Potential benefits of refinancing a second home mortgage include:
Lower interest rate
Lower monthly payments
Access to cash (if it’s a cash-out refi loan)
Are Refinance Rates Higher for a Second Home?
The rate on a refinance will likely be higher for a second home than for a primary, because the lender sees it as more risky to make a loan for a second home than for a primary. The borrower is more likely to prioritise the mortgage payments for a primary residence over a mortgage payment for a second home. So, in the event that the borrower has a financial reversal, borrowers would skip mortgage payments on the second home so they can keep making mortgage payments on their primary.