How to Refinance a Second Home

Couple planning to refinance their second home

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If you’d like to refinance a second home, you’ll encounter a lot of the same requirements that you would when refinancing a primary residence. A lender will look at a variety of factors as it reviews your refi application, such as your income, credit score, debts, and home equity. At the same time, you’ll want to find the best deal by checking out interest rates and fees charged by several lenders.

How to Refinance a Second Home

As with any mortgage, getting a refi loan for a second home requires a borrower to go through various steps, such as deciding whether refinancing makes sense. If it does make sense, then a borrower must:

  • 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 want to take advantage of lower interest rates. If interest rates have fallen enough that your savings on interest would make up for closing costs and other mortgage expenses, it might make sense to refinance your second home.
  • You need cash. If you choose a cash-out refinancing, you’ll be replacing the current mortgage with a larger one. Any money left after paying off the initial mortgage and covering closing costs and other expenses for the new loan goes to you in a lump-sum payment.
  • You want to accumulate equity more quickly. Let’s say you’ve got a 30-year, fixed-rate mortgage on your second home. If you switch to a 15-year, fixed-rate mortgage, for example, you’d build equity at a faster rate.
  • You want to move to a different type of loan. Let’s say you’ve got an adjustable-rate mortgage (ARM) on your second home, but you’d like more stability in terms of interest rates. Shifting to a 30-year, fixed-rate mortgage, for example, would provide that stability. Now, if you’ve got a 30-year, fixed-rate mortgage, you may be able to tap into the initially lower interest of an ARM. However, this strategy would work only if you aren’t looking to sell your house within five years or before the ARM’s adjustment period ends, perhaps triggering a higher interest rate.

Interest rates for refinancing a second home may be higher than they are for refinancing a primary residence. That’s because lenders consider second home loans riskier than loans for primary residences. Here’s why. Suppose a borrower faces financial problems. They may prioritize making mortgage payments on their primary residence at the expense of mortgage payments on their second home.

Just as some situations might make refinancing a second home a good idea, other situations may make it a bad idea. Those less-than-ideal situations include:

  • Your current interest rate is low. If the interest rate for a refinance would be higher than the interest rate on your existing mortgage, refinancing the loan likely wouldn’t make sense.
  • Your current mortgage comes with a prepayment penalty. Some lenders charge a prepayment penalty if you pay off your mortgage early, including when you refinance the loan. If this is the case, it might cost you more than it’s worth to pursue a refi.
  • You plan to sell your second home in a few years. If you’re eyeing a sale in the near future, the lower monthly payments you’d gain with a refi might not offset the closing costs and other expenses for the new loan.
  • You have had the current mortgage for a while. As you make payments on a mortgage, you gradually go from paying interest to chipping away at more of the principal. But if you take out a refi loan, you’ll return to covering more of the interest with each payment than the principal. As a result, you’d be accumulating equity at a slower rate than you had been before.
  • You might face foreclosure. If you score a lower interest rate with a refi but you wind up with larger monthly payments, your finances may become strained. In that case, you could fall behind on the payment and put your second home at risk of foreclosure.

What You Need to Refinance a Second Home

As with any mortgage, a refi for a second home comes with a number of financial, documentary, and property requirements.

Financial Requirements to Refinance a Second Home

Among the common financial requirements for a refi loan are:

  • Credit score: The minimum credit score needed to refinance a second home is typically higher than it is for the mortgage on a primary residence (which often is 620).
  • Debt-to-income ratio: Generally, a lender requires a debt-to-income ratio of 45% or less for a second home mortgage. This ratio, known as DTI, divides all of your monthly debt payments by your gross monthly income.
  • Cash reserves: A lender may ask for proof that you’ve got enough cash on hand to cover two or more mortgage payments.

Qualifying for a loan to refinance a second home may come with more strings attached than qualifying to refinance a loan on a primary residence. For instance, a borrower taking out a second home refi loan may need a higher credit score than a borrower taking out a refi loan for a primary residence.

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 documents give a lender an overview of your income and your cash reserves.
  • Credit report: This document provides an in-depth look at where your credit score stands, how much debt you’re carrying, and what your payment history is.
  • 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:

  • Amount of equity: A lender typically wants a borrower to have home equity of at least 20% after the refi loan closes.
  • Loan-to-value ratio: For a regular refi on a second home, the maximum loan-to-value ratio (LTV) generally is 90%. If the loan is a cash-out refi, a lender typically looks for a maximum LTV of 75%. This ratio compares the amount of your mortgage with the home’s appraised value.
  • Length of ownership: A lender normally won’t approve a cash-out refi if you’ve owned your second home for less than six or 12 months, depending on the type of loan.

Choosing a Lender

Questions to ask when choosing a lender include:

  • What kinds of refi loans do you offer?
  • Who do your requirements for a second home refi compare with your requirements for 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

Among the items that might be negotiable when you’re taking out a refi loan are:

  • Interest rate
  • Closing costs
  • Loan application fees
  • Loan origination fees
  • Underwriting fees
  • Prepayment penalties

Compare the Best Mortgage Lenders

Lender Min. Credit Score Max. DTI Ratio Days to Closing
Rocket Mortgage 620 50% 26
Fairway Mortgage 620 47% 30–45
Caliber Mortgage 620 49.90% 30
Bank of America 620 55% Not disclosed
Prosperity Home Mortgage 600 50% 30
Cherry Creek Mortgage 620 50% 30
Primary Residential Mortgage 660 50% 21–30

What Is a Cash-Out Refinance?

A cash-out refinance lets you borrow more than what you owe on your existing mortgage and get the difference in cash. So, if your home is valued at $350,000 and you owe $150,000, that leaves you with $250,000 in equity. A cash-out refi enables you to borrow some of that equity and add that dollar amount to the principal of your new mortgage.

How Much Equity Do You Need to Refinance a Second Home?

A lender generally requires at least 10% equity in the property for a standard refi loan, or at least 25% equity for a cash-out refi loan. But equity requirements differ depending on what type of loan it is and whether it’s backed by Fannie Mae or Freddie Mac.

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?

Refinance rates typically are higher for a second home than a primary residence. That’s because lenders view second home loans as riskier than loans for primary residences. Borrowers tend to prioritize mortgage payments for a primary residence over mortgage payments for a second home. So, if they get into a financial bind, borrowers might skip mortgage payments for their second home, so they can focus on mortgage payments for their primary residence.

Article Sources
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  2. Freddie Mac MyHome: “Considering an Adjustable-Rate Mortgage? Here’s What You Should Know.”

  3. University of Minnesota Extension. “When Should You Refinance Your Home Loan?

  4. Better. “What Credit Score Do I Need to Refinance?

  5. Fannie Mae. “Selling Guide: Debt-to-Income Ratios.”

  6. Consumer Financial Protection Bureau. “Create a Loan Application Packet.”

  7. Better. “Will I Need an Appraisal for a Refinance?

  8. HSH. “How to Refinance a Second Property.”

  9. American Financing. “What Is the Maximum and Minimum Second Home Cash-Out Refinance LTV?

  10. Fannie Mae. “Selling Guide: What Are the Property Ownership Requirements for a Cash-Out Refinance?

  11. National Association of Realtors. “10 Questions to Ask a Mortgage Lender: Do You Know Them All?