What To Know About Second Home Refinancing

Why refinance a second home or investment property

There are many reasons you might decide to refinance a second home or investment property, including:

• Getting a lower interest rate, either because rates have fallen or your credit has improved since you first took out the loan
• Adjusting the loan term
• Switching from an adjustable-rate mortgage to a fixed-rate mortgage
• Consolidating your primary residence and second home mortgages into one loan
• Using a cash-out refinance to fund home improvements or other expenses

Some investors even use cash-out refinancing to buy more properties.

How to refinance a second home or investment property

There are two primary ways to refinance a second home:

• Rate-and-term refinance: A rate-and-term refinance replaces your current mortgage with a new one that has a different interest rate, different loan term or both.
• Cash-out refinance: A cash-out refinance replaces your existing mortgage with another, bigger one, allowing you to pocket the difference between the two loans in cash. The amount of cash you can withdraw is based on your home equity and the lender’s requirements.

Whichever option you choose, the process usually looks something like this:

1. Understand your goals

Before deciding to refinance your second home or investment property, determine why you want to refinance. For example:

• Do you want lower monthly payments? If so, a rate-and-term refinance makes sense.
• Do you want to access equity to pay for other large expenses? A cash-out refinance could be for you, provided you can withdraw enough equity.

It’s also worth considering whether refinancing will help you meet your goals. Generally, refinancing could make sense if you can lower your interest rate. That might be tough to do at today’s rates, depending on when you first got your mortgage.

Keep in mind, too, that refinancing could reset your loan term to 30 years. To pay off your loan more quickly, you’ll need to refinance to a shorter term, which could increase your monthly payments, even if you’re refinancing a smaller balance or to a lower rate.

2. Check if you qualify

Determine whether you meet your lender’s requirements. These generally include:

• Equity: In order to refinance, you’ll generally need at least 20 percent equity in your home, and sometimes more if it’s a second home or investment property. In addition, most lenders don’t let you tap more than 80 percent of your home’s value in a cash-out refinance.
• Credit score: Many lenders require a minimum 620 credit score — but if your credit score is higher, you’ll likely qualify for a better rate. If you’re trying to lower your monthly payment, it may be worth trying to improve your credit before you refinance.
• Debt-to-income (DTI) ratio: Lenders prefer that your new mortgage payment and other debt payments take up no more than 36 percent of your gross monthly income, and many require 43 percent or less.
• Cash reserves: Some lenders require you to have reserves set aside equal to several months’ worth of mortgage payments.

3. Gather preapproval documents

No matter what type of refinance you’re doing, you’ll need to provide documents similar to those you submitted when you applied for your original mortgage: W-2s, pay stubs, bank and retirement account statements and previous tax returns. The lender will also want information on your primary residence and any other properties you own.

4. Get at least three refinance quotes

Once your documents are prepared, shop around with at least three mortgage refinance lenders. Refinance rates, fees and requirements can all vary by lender. Consider starting with your current lender if it offers any discounts for returning borrowers, but remember: You can always choose a different lender if it offers a better deal.

5. Pay closing costs

You’ll need to pay closing costs on a second home refinance. These are often less expensive than the closing costs you paid when you bought the property, but they include similar expenses, such as an origination fee, an appraisal fee and a credit check fee.

Differences between refinancing a second home vs. a primary residence

• A second home refinance is riskier. Lenders generally consider second homes or investment properties riskier, as, in a financial pinch, you’d more likely pay the mortgage on your primary residence. Lenders compensate for this risk by charging higher interest rates on mortgages and refinances.
• It’s harder to qualify for a second home refinance. Many lenders have more stringent requirements for refinancing second homes and investment properties. You might need more equity to refinance a second home or investment property than you would for a primary residence. You might also need to have more cash in reserve.
• Some lenders might shy away. Many lenders don’t offer investment property loans, let alone investment property refinances, so you might have limited options.

FAQ

• Can you refinance a second home if you earn rental income on it?
  

  Yes, you can refinance a second home that you are renting out. As long as you can document your rental income, you can use it to qualify for the refinance.

• How are second home refinance rates set?
  

  Second home mortgage refinance rates are influenced by many factors, including current market trends and your credit history and finances. Because they’re considered riskier, second home mortgages tend to come with slightly higher rates.

• Can you do a cash-out refinance to buy a second home?
  

  You can do a cash-out refinance to buy a second home, provided you qualify. You might find more favorable terms refinancing your primary mortgage compared to refinancing a second home mortgage.