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How To Refinance Your Second Home

April 17, 2024 5-minute read

Author: Victoria Araj

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Refinancing your second home can be a key strategy for homeowners seeking to capitalize on lower interest rates. It’s an option to potentially decrease monthly payments, access home equity, and realign with current financial goals.

But refinancing a second home comes with its own challenges, so there are a few things you need to know before getting started.

Key Takeaways

  • Refinancing your second home can present an opportunity to lock in lower interest rates, leading to significant savings over the life of your loan.
  • Opting to refinance creates the possibility to adjust your loan's terms or access equity for other investments or expenses.
  • Refinancing a second home or investment property tends to be more complicated than refinancing when you own only one residence.
  • Deciding whether to refinance involves careful consideration of the unique requirements, potential benefits and current financial landscape.

What Is A Second Home?

A second home is typically defined as a single-family home that you occupy for part of the year in addition to your primary residence. This could be a vacation home or a property that you regularly use for business.

However, a second home differs from an investment property. While a second home is meant for personal use, an investment property is purchased primarily to generate income.

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Why Refinance Your Second Home?

When you refinance your mortgage, you’re replacing your current mortgage with a new loan at different rates and terms. Refinancing a second home can be a strategic financial move. Some strategies include:

  • Leveraging lower interest rates to reduce your monthly payments.
  • Shortening your loan’s term to pay off the mortgage faster or extending it to secure a lower monthly payment.
  • Accessing your property’s equity for renovations, debt consolidation, or other investments.

Refinancing A Second Home Vs. A Primary Residence

Understanding the refinancing process for a second home involves recognizing the key similarities and differences compared with refinancing a primary residence.

Similarities

  • You’ll have to apply for refinancing with your lender.
  • Your lender will require certain documentation and check your credit score.
  • You’ll go through closing and replace the current mortgage with a new loan.

Differences

  • Refinancing a second home typically comes with higher interest rates.
  • These loans come with stricter lending requirements.
  • You may need to prove you have more cash reserves.

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Can You Refinance a Second Home That Earns Rental Income?

Yes. Even if you rent out a second home, you can still refinance and potentially use the rental income to help qualify for the refinance.

For a home to be considered a second home rather than an investment property, you must occupy the home for at least 14 days annually. You can rent out a second home when you aren’t using it, but you must personally stay there for at least 10% of the time it’s rented out.

To refinance, you must provide your most recent tax returns with Schedule E included and a copy of your rental income over the last 12 months. This information helps lenders more accurately assess your financial situation when determining your refinancing eligibility.

Qualification Requirements For Refinancing A Second Home

Refinancing a second home means meeting specific lender requirements, including:

Credit Score

To refinance a second home, you’ll have to take out a conforming loan through Fannie Mae or Freddie Mac, and having a solid credit score is critical. You’ll need to have a minimum score of 620 to qualify, and you could receive a lower interest rate if you have a good to excellent credit score, ranging from 670 to more than 800.

Loan-To-Value Limits

The loan-to-value ratio (LTV) compares the appraised value of the home you want to buy with the amount you desire to borrow to help determine your eligibility. So, if you leave 20% equity in your home, the LTV is 80%.

With a rate-and-term refinance for a second home, you can leverage up to 90% of the property value, meaning you’ll need 10% equity. However, with a cash-out refinance for a second home, the maximum LTV is 75%, so you’d need 25% equity.

Debt-To-Income Ratio

The debt-to-income ratio (DTI) is the percentage of your monthly debt payments compared to your income. Most lenders require a DTI of 43% or less.

Cash Reserves

Because the property is not your primary residence, most lenders usually require 2 – 4 months of mortgage payments to ensure you can still make the payments in case of a financial setback.

For investment properties, however, lenders often require cash reserves of 6 months or longer.

Second Home Refinance Rates

Various factors influence mortgage rates, including current market trends, your credit profile and how much risk you pose to a lender. Mortgages for second homes tend to be riskier because lenders know if you run into financial problems, you’ll prioritize your primary residence first.

So, these loans tend to come with higher interest rates. However, a good credit score and a timely payment history can help you secure a good rate when you refinance.

Steps To Refinancing Your Second Home

Refinancing a second home is similar to refinancing a primary residence. If you’re looking to save money, adjust your term, or use your equity by refinancing, here’s what you need to do.

Gather Required Paperwork

You’ll need to provide specific paperwork when you refinance a second home. Your lender will ask for copies of your financial documents, such as W-2s, pay stubs, bank statements, and, if applicable, rental income records.

Compare Rates and Lenders

It’s a good idea to compare rates from various lenders. Doing so can reveal significant differences regarding terms and refinance rates, so it's best to shop around to lock in the best deal.

Refinancing Second Home FAQs

Here are answers to the most commonly asked questions regarding refinancing a second home.

What are the differences between refinancing a second home vs. a primary residence?

The main differences include higher interest rates, stricter lending criteria and the need for additional documentation, reflecting the higher risk associated with non-primary residences.

How does earning rental income influence my refinancing options?

Rental income can help strengthen your application by improving your DTI but requires thorough documentation, including tax returns and rental history.

What can I do to secure the best rate for my second-home refinance?

Maintaining a strong credit score, shopping around for the best rates and effectively leveraging your home’s equity are key strategies for securing favorable refinancing terms.

The Bottom Line: You Can Refinance Your Second Home

Refinancing a second home can offer numerous benefits. From reduced interest rates and lower monthly payments to accessed equity, the potential savings could add up. However, refinancing any mortgage comes with specific requirements, like higher minimum credit scores, debt-to-income ratio considerations, and the need for a higher loan-to-value ratio.

Do you own a second home and want to explore possibly reducing your monthly payments or cutting down on interest expenses? Start the approval process and take the first step toward optimizing your investment with Rocket Mortgage® today.

Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.