Your mortgage can be refinanced to create a new loan with lower interest rates and more manageable monthly payments. You could reduce your monthly payments and save if you do so. But what happens if you also have a second mortgage? Will you be able to refinance those loans? And can your first and second mortgages be refinanced simultaneously? Read to know more about second home refinance.
Are second homes and investment property the same?
You need to know if this second home or property is something you plan to rent out. Most of the time, rental properties are also called investment properties. A second home is a property that the owner lives in at least for a part of the year. This could be for a few weeks, a few months, or just on the weekends. As long as you live there most of the time, you can call it a vacation home.
On the other hand, an investment property is a home you own that is rented out to someone else. People often rent out investment properties as a way to make money without doing anything. However, any property you own that someone else lives in can be considered an investment property.
What are the different types of second mortgages?
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Home equity loan
A home equity loan is like your main mortgage, but the amount you can borrow depends on how much equity you have in your home. Equity is how much your home is worth minus how much you still owe on your mortgage.
You can then use that equity to get a second mortgage loan, also called a “home equity loan.” You’ll get the money all at once, and like your main mortgage, you’ll pay it back in monthly payments with interest.
You can buy anything with that money. If you use it to pay for home improvements that make your home worth more, you can write off the interest you pay on your taxes. If you have questions, you should talk to a tax expert.
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Home equity line of credit (HELOC)
Again, the amount you can borrow from a HELOC is based on the value of your home. A HELOC, on the other hand, works more like a credit card, with a maximum credit limit based on the home’s equity amount.
In the last part of the term, you pay back both the principal and the interest in full. The first couple of years are called the “draw period.” You can take money out and put it back in during this time if you want to use it later for other projects. You only have to pay interest on what you borrow during this time.
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Piggyback mortgages
Borrowers might get these to avoid paying private mortgage insurance (PMI), which protects lenders and can add hundreds of dollars to a borrower’s mortgage payment. These loans are also called 80-10-10 loans.
This is because a standard first mortgage loan pays for 80% of the cost of the home. They use a second mortgage loan, usually a home equity loan or HELOC, to pay for the other 10%. Then, with their down payment, they pay the last 10% of the home’s price.
How to confirm if you have a second home and not a rental property?
Mortgage investors Fannie Mae and Freddie Mac use the same rules as the IRS to figure out if you have a second home or a rental property. In order for a property to be considered a second home, the owner must live there for the longer of 14 days – 10% of the days you would have been able to rent the property for fair rental value if you hadn’t done this
If you don’t want to do the math, the general rule is that you must live in the property for a big chunk of the year if you want to rent it out. You can deduct mortgage interest on your primary home and second home but not on an investment property. Also, the interest rates on a rental property may be a little bit higher.
What do you do if you get rental income for a second home?
People often rent out their vacation homes for short periods when they’re not using them. This is because vacation homes don’t usually have long-term tenants. If you rent out your second home through sites like VRBO that are approved for short-term rentals, you can use that money to help you refinance. In order to do this, there are certain requirements that need to be met like:
- Your last year’s signed tax return, which includes schedule E.
- A copy of the rental platform’s payout summary and income report for the last 12 months. The money made must come from the vacation home that is being refinanced.
What are the rates for a second home refinance?
Generally, the rate on a second home will be slightly higher than the rate on your main home. Risk management is the key to smart lending. Because a property is your second home, the idea is that if you run into financial trouble in the future, you’ll be more likely to leave that property than your main home, where you spend most of your time. Most of the time, a lender will charge you a higher rate on a mortgage for a vacation home because they are taking on more risk.
What paperwork do you need to qualify for a second home refinance?
In many ways, the documents you need to refinance your vacation home are the same as those you need to qualify for a mortgage on your main home.
- Your federal tax returns from the last two years. If you have rental income, you should include schedule E.
- W-2s from the last two years and pay stubs from the last few months.
- The lender will need your 1099s.
- If you are self-employed, include your statements of profit and loss.
If you want to qualify with alimony or child support payments, you’ll need proof that you’ve been getting them regularly for at least 6 months and that they’ll keep coming for at least the next 3 years. This information can be found in the papers for your divorce or other legal papers.
You’ll also need bank account statements and statements for any other assets you want to use to qualify. Plan to give statements from at least two months ago or from the most recent quarter. If you sell anything or get money as a gift, you also need to keep track of that.
How to refinance a second mortgage
- Get proof of your income
- Check your credit report
- Check the ratio of your debt to income.
- Do a loan-to-value ratio check
Loan-to-value limits on a second home refinance
You may hear lenders talk about a loan-to-value ratio when you talk to them (LTV). In a refinance, you can think of LTV as the opposite of how much equity you already have. There are limits on how high your LTV can go when you want to refinance, which means you need to leave a certain amount of equity in the property. In order to reduce risk, the maximum LTV on a second home will be a little lower than on a main home.
Credit requirements for a second home refinance
If you want to refinance the mortgage on your second home, most of the time Fannie Mae or Freddie Mac will offer you a conventional loan. This means that your median FICO score should be 620 or higher at the very least. It’s important to remember that a higher credit score can help you get better rates when you refinance, along with having more equity in your home.
Debt-to-income ratio for a second home refinance
Your DTI ratio is another important consideration. It compares your monthly debt payments, which include installment loans and revolving accounts, to your monthly income. It is advised to keep your DTI, which includes all house payments, at no more than 43% in order to give yourself the best refinance rates.
Cash reserves for a second home refinance
Reserves are another topic that your lender can bring up. This phrase refers to the number of months you would be able to make your mortgage payment in the event that you lost your job or experienced another unforeseen financial setback. The abbreviation PITIA makes it easy to remember the five elements that are considered when determining reserves:
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Principal
This portion of your monthly mortgage payment is used to reduce your loan’s outstanding balance. This will be less than your interest charge when you are nearer to the start of your term than the finish. Things change later on in the term.
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Interest
In addition to the principal payment, interest is the additional compensation the lender or mortgage investor receives for making the loan.
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Taxes
These are the monthly property taxes. They are sometimes divided into 12 equal monthly installments and deposited into an escrow account, though one is not always necessary.
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Insurance
Your yearly homeowner’s insurance premium is frequently divided into monthly payments and placed in escrow.
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Association dues
Even though you pay your dues separately from your monthly mortgage payment, if you are a homeowner, your monthly dues are considered for qualification purposes.
The amount of reserves required will depend on your mortgage’s investor and your qualifying factors, but if your rental income comes from VRBO you’ll need at least two months’ worth of reserves. Planning to have to demonstrate at least this amount from your available assets is a good idea.
Cash-out refinance for a second home
A mortgage refinance known as a cash-out refinance enables a borrower to benefit from the equity in their house. If you want to refinance a second home, you might be considering your options and wondering if a cash-out refinance is the right option for you. Yes, you do have the choice to withdraw money and use the value of your house to meet your individual financial goals.
Bottom line
It is possible to refinance a second house, but there are many factors to consider first. Be sure that refinance is the right financial decision for you and that you’ll be approved for one.
FAQs
How do you refinance a second home?
To refinance a second home, borrowers would need strong to excellent credit scores because mortgage lenders frequently have more stringent standards that could result in higher interest rates. Nonetheless, it happens frequently for both house buyers and real estate investors to refinance a second home, holiday home, or investment property. Refinancing a second home is an option if you have adequate equity in your house.
Can I refinance my mortgage to buy a second home?
Certainly. Buyers can use the equity in their current residences to finance the purchase of a second property. Some people refinance their first mortgage with cash out and use the proceeds to pay a second home down. By acquiring a home equity loan or a HELOC, you can also leverage the equity in your present mortgage.
Can you refinance a home that is not your primary residence?
A second house that is not the buyer’s primary residence can, in fact, be refinanced. Although the procedure is largely the same as for a refinance of a primary residence, mortgage lenders may impose stricter credit score requirements or higher interest rates on a refinance of a second residence.
How do second home mortgage rates compare to other mortgage rates?
It’s not unusual for a mortgage lender to charge a second home refinance a higher interest rate than it would for a primary mortgage. Nonetheless, prices will differ, so it’s crucial to compare prices.
Does refinancing a second home affect my credit score?
Yes. When borrowers take on new debt, their credit scores often decline. Still, since refinancing replaces an existing mortgage loan with a new one for a similar amount, the effect on credit scores is frequently minimal.
How many times can you refinance a second home?
The number of times you can refinance a vacation property is technically unlimited. Still, depending on the type of loan, lenders may have restrictions on how frequently you can do so. When they can get cheaper interest rates or do away with mortgage insurance, homeowners occasionally may desire to refinance a second house more than once. However, several second home refinances may result in more closing fees, and certain lenders may impose prepayment penalties on borrowers.
What are the drawbacks of refinancing to purchase a second home?
Refinancing a second house to pay for a vacation home or other real estate investments has drawbacks, such as expensive closing costs, using your primary home as collateral to receive a loan, and perhaps increased mortgage payments.
Can you refinance a primary mortgage when you have a second mortgage?
Yes, you can. If you have a second loan, it is still possible to refinance your primary mortgage, but the process is more difficult. Usually, if you default on your mortgage, your primary lender gets the first claim, and your second mortgage lender has the second claim.
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