How to refinance your second home

If you need to increase cash flow, you may find yourself wondering, “Can I refinance a second home?” Accessing your home equity could help you get over a financial hurdle.

The process for refinancing a second home isn’t the same as refinancing for your primary home, so it’s a good idea to understand the process before you go through the steps with a trusted lender.

We’ll walk you through how to refinance your second home, including information about refinance rates and more.

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.
• 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 unique requirements, potential benefits, and the 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.

The following properties can qualify as a second home:

• Seasonal homes like lake cabins that you visit in the summer and close during winter
• Year-round-use homes, like a beach house that you rent out and visit yourself
• A condo or pied-à-terre that you keep in a city that you regularly visit for work

A second home is different from an investment property, which you purchase with no intention of occupying yourself.

Why refinance your second home?

Refinancing a second home can be a good financial decision in certain circumstances. When you’re replacing your old loan with a new loan with a new interest rate, you may want to carefully consider the results. Here are several reasons you may want to refinance your second home:

• Lower your interest rate
• Modify your loan term or lower your monthly payments
• Pull out cash to renovate your primary residence
• Pull out cash to pay down other debt

You may have noticed that when you bought your second home, you ended up with a slightly higher mortgage rate than you’d get with a primary mortgage. Similarly, second home refinance rates may differ from primary home refinance rates.

Here’s why: Lenders typically view your second mortgage as riskier because homeowners are more likely to stop making payments on the second home, not their primary home.

Refinancing a second home vs. a primary residence

Two of the main types of refinances are a rate-and-term refinance, which is generally a no-cash-out refinance, and a cash-out refinance. A no-cash-out refinance involves refinancing the remaining unpaid balance on your mortgage only, while a cash-out refinance involves getting a portion of your equity returned in cash. Cash-out refinances may have a slightly higher interest rate if you are borrowing more money.

Many of the steps for refinancing a second home are the same as with a primary residence, but you might encounter differences. For example, you may need to provide your lender with more documentation than you would if you were refinancing a primary residence.

Here are some quick similarities and differences between refinancing a primary vs. second home.

Similarities

• You’ll have to apply and undergo underwriting with a lender.
• Your lender will check your credit score, income, and other financial information.
• You’ll go through closing and replace the current mortgage with a new loan.

Differences

• Second-home refinances typically have higher interest rates.
• These loans come with stricter lending requirements.
• Generally speaking, you can’t buy a second home with an FHA or other government-backed loan.

Can you refinance a second home that earns rental income?

Yes, you can refinance an investment property that you rent out. To classify a rental as a second home, the IRS requires you to live in the property for 14 days per year or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer) for it to be a second home and not an investment property. You’ll need to prepare Schedule E of your taxes to show your rental income over the last 12 months. You may want to consult with a tax professional to understand more about how rental income is taxed.

Qualification requirements for refinancing a second home

How do you refinance a second home? Let’s look at some of the basic things you need to know, including information about your credit score, loan-to-value limits, debt-to-income ratio, and cash reserves.

Credit score

Your lender checked your credit score when you first bought your home to learn how you handle debt. They’ll check it again when you refinance. You’ll need a score of at least 620 to refinance a second home. The higher your credit score, the lower your interest rate will be. Keep in mind lenders set their own criteria, so check with them for specific requirements. 

Loan-to-value limits

You’ll probably need a loan-to-value (LTV) ratio of at least 80%, meaning you’ll have 20% equity in your home.

But what is LTV, exactly? LTV compares the amount you’re financing with the appraised value of your property. Lenders use LTV to determine your interest rate and how much you can borrow.

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

Debt-to-income (DTI) ratio refers to your monthly debt payments divided by your gross monthly income. Lenders use it to measure your ability to manage monthly payments you plan to borrow.

How would you calculate debt-to-income ratio? Let’s say your monthly debt payments are $2,000 and your income is $6,000. You’d divide $2,000 into $6,000 for a DTI of 33%. In most cases, an ideal DTI is under 43%. Again, lenders set their own criteria, so check with yours for their requirements.

You can reduce DTI by paying off existing debt, boosting your income, and not applying for new credit or loans.

Cash reserves

Cash reserves are funds you can access to cover housing-related expenses, including a mortgage. They can include money in savings and checking accounts and investment funds (like stocks, bonds, mutual funds, certificates of deposit, money market funds, and trust accounts).

Because the property is not your primary residence, most lenders usually require 2 to 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. Check with your lender to determine their guidelines.

Second-home refinance rates

Second-home mortgage rates are typically higher because lenders know you’ll prioritize your primary mortgage if you fall on hard times, and they know a second home may be more likely to fall into disrepair.

Second mortgages are inherently seen as a riskier investment, but that doesn’t mean it isn’t worth it to try to reduce your interest rate or lengthen your loan term. Note that lengthening your loan term will cause you to pay more in interest because you’re stretching your payments over a longer period.

FAQ

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

There are a few differences between refinancing a second home vs. a primary residence, including higher interest rates for a second home, required documentation, and proof of cash requirements.

Interest rates are usually higher for second homes compared to primary residences. Lenders may require more/different documentation, and they may require higher cash requirements. Check with your lender for specifics concerning your situation.

How does earning rental income influence my refinancing options?

Rental income may strengthen your application because it could lower your DTI. The additional income can offset the debt involved when you borrow or refinance. Prepare to have documentation of this income, such as providing bank statements and/or lease agreements.

How can I secure the best rate for my second-home refinance?

The advice for getting a second-home mortgage is like advice related to getting a mortgage for a primary home: Maintain a high credit score and keep your DTI low. You may also want to consider different types of lenders to compare interest rates and other factors, such as different loan terms. Remember, you don’t have to use the same lender you used for your primary mortgage.

The bottom line: You can refinance your second home

If you’re thinking about refinancing your second home, it can be a smart move if you’ll save money over time. Check with several lenders about all your options, including what you’ll pay in closing costs, before you make a final decision.

Ready to refinance? Rocket Mortgage^® can help you learn more about all your options. Get started today.