Why You Should Refinance Your Second Home And How To Do It Right

Refinancing can offer plenty of benefits, including helping you to lower your interest rate, get rid of private mortgage insurance (PMI) or adjust your monthly payments. But you might be wondering whether you can refinance a second home the same way you can your primary residence.

The good news is that the process for refinancing a second home isn’t all that different. There are several different types of refinance loans to choose from, each with some unique benefits, but there may also be some disadvantages to consider.

Why Should You Refinance A Second Home?

You may be wondering why you should refinance a second home and what benefits there are. Refinancing can save you money, simplify your monthly payments, and even allow you to take advantage of the equity in your home. Here are a few reasons you might want to refinance your second home.

Take Cash Out Of Your Home

A cash-out refinance allows you to tap into the equity you’ve built in your home. When you take out a new mortgage, you can withdraw some of that equity in cash. Your home’s equity is the difference between what you owe on the mortgage and your home’s current value.

You can typically have no more than a 75% loan-to-value ratio (LTV) when you use a cash-out refinance on a second home. So if your home is worth $200,000, you can borrow up to $150,000 for both the mortgage and cash-out combined. If you owe $100,000 on your mortgage, you could take up to $75,000 in cash.

Obtain Lower Interest Rates

Refinancing your mortgage can often help you get a lower interest rate. Let’s say you had fair credit when you initially applied for a mortgage, so you weren’t able to qualify for the best rate. If your credit is now excellent, you may qualify for a far better rate.

Another way you could lower your interest rate is if the market interest rates have gone down since you initially took out your loan. For example, when interest rates were slashed in 2020, many people were able to refinance their loans for far better interest rates.

A lower interest rate can lower your monthly payments, as well as save you tens of thousands of dollars over the course of your loan.

Refinance An Adjustable-Rate Mortgage (ARM)

When you take out an adjustable-rate mortgage (ARM), you’ll receive a low introductory interest rate for a certain period. Once the introductory period is up, your interest rate will adjust annually or semi-annually based on market conditions. While that means, your rate could decrease, it could also increase – multiple times throughout the life of the loan.

If you’re coming to the end of your introductory market rate period, it may be a good idea to refinance your second home. With a fixed-rate mortgage, your interest rate won’t change over the life of the loan.

Types Of Second Home Refinances

If you’re considering refinancing your second home, there are several types of refinances you can choose from. The best refinancing option for you will depend on your current situation and goals.

• Cash-out refinance: A cash-out refinance replaces your existing mortgage with a new loan at different rates and terms. It also allows you to withdraw some of the equity you’ve built in your home as cash. You can then use the funds for anything from debt consolidation to home renovations.
• Rate-and-term refinance: A rate-and-term refinance is the most basic type of refinance. It simply replaces your existing mortgage with a new one. It can help you lower your interest rate (depending on market conditions), extend or shorten your repayment term, and ultimately lower your monthly payment.
• Cash-in refinance: A cash-in refinance is the opposite of a cash-out refinance. Rather than taking cash out, you make a lump-sum payment and lower the balance of the loan. Your new loan will be for a lower amount, which can also lower your monthly payment and eliminate PMI.

Why Is Refinancing A Second Home Different From Refinancing A Primary Residence?

The process of refinancing a second home is fairly similar to refinancing a primary residence. However, lenders do see these loans as riskier and, therefore, tend to have stricter credit requirements and charge higher interest rates.

When you’re refinancing your primary home, there may be less risk of mortgage default for everyone involved. That’s not necessarily as true for second homes. If things get tight financially, borrowers may not be able to afford payments on a second property.

Because of this, in addition to the slightly higher interest rates and credit requirements needed, you may also need to have more equity and a larger cash reserve than would be required for a primary home.

Fannie Mae’s Second Home Refinance Guidelines

The Federal National Mortgage Association (FNMA) – also known as Fannie Mae – is a government-sponsored enterprise. Both Fannie Mae and Freddie Mac buy and guarantee mortgages issued by lenders on the secondary mortgage market.

These two agencies have similar regulations and programs. If you want to refinance your second home, Fannie Mae requires that you meet the following guidelines:

• Must be occupied by the borrower for some portion of the year
• Must be a one-unit dwelling
• Must be suitable for year-round occupancy
• Must have exclusive control over the property
• Must not be a rental or timeshare arrangement
• Must not be subject to any arrangements that give a management firm control over the property’s occupancy

How To Refinance A Second Home

As mentioned, the process of refinancing a second home isn’t all that different from the process of refinancing a primary residence. Here’s how to get started:

1. Meet The Qualification Requirements

Fannie Mae and Freddie Mac have a set of minimum qualification requirements borrowers must meet to refinance their second homes. Additionally, each lender may have its own unique requirements.

Credit Score

Anytime you apply for a loan, including a refinance loan for a second home, your credit score is one of the most important factors. Generally speaking, you need a credit score of at least 620 to qualify for a conventional loan. However, lenders may require higher scores for second homes because of the increased risk.

Loan-To-Value Limits

Loan-to-value ratio (LTV) refers to the percentage of the home’s value that’s financed. For a rate-and-term refinance on a second home, the maximum LTV is 90%, meaning you can refinance as long as you have at least 10% equity in the home. The maximum LTV for a cash-out refinance on a second home is 75%.

Debt-To-Income Ratio

Your debt-to-income (DTI) ratio is the percentage of your income that goes toward debt, including your mortgage payment. To qualify for a refinance loan on your second home, you must generally have a DTI of 50% or less.

2. Gather Necessary Documents

Once you’re confident you’ll qualify for a refinance loan on your second home, it’s time to gather the necessary documents. Some of the documents you’ll need for the refinance process include, but aren’t limited to:

• Home appraisal
• Credit report
• Bank statements and proof of assets
• Tax returns, W-2 forms and pay stubs
• Government-issued ID

3. Compare Rates

Before you apply for a refinance loan, it’s important to shop around for the best deal. You may be able to get your refinance loan through the same lender you got your original loan, but you shouldn’t necessarily assume they’ll offer you the best interest rate. Instead, take some time to get preapproved with several lenders to find the best rate.

4. Complete Your Loan Application

Once you’ve narrowed down your search to a single lender, it’s time to complete your application. The application process itself won’t take long to complete. However, the underwriting and approval process can take anywhere from weeks to months, depending on certain factors.

Second Home Refinance Rates

Generally speaking, second home loans tend to have higher interest rates than loans for your primary home. And if you refinance your second home loan, you’ll also typically end up with a slightly higher interest rate. Unfortunately, this higher rate can add thousands – or tens of thousands – of dollars to the price of your mortgage.

In 2023, interest rates are considerably higher than they were just a couple of years ago. If your goal is to refinance for a lower interest rate, it may be worth waiting until the market rates have come down slightly. But if you’re refinancing for other reasons, it may still be the right choice.

Are There Disadvantages To Refinancing A Second Home?

Refinancing a second home can offer plenty of benefits. However, there are also some downsides you should consider before you move forward with the refinance.

• High closing costs: High closing costs can add thousands of dollars to the cost of your refinance. You can expect to pay between 2% – 6% of the final loan amount. Alternatively, you could look into a no-closing cost refinance.
• Interest rate risk: While many people refinance to get lower interest rates, refinancing at the wrong time can actually lead to a higher interest rate. Before you go through with a refinance with the sole purpose of lowering your rate, make sure you’re actually saving money in interest, and that you’re saving enough to make the added costs worth it.
• Risk of default: Anytime you take out a new loan at different rates and terms, you risk default – just as you risk default when you take out any loan. If you run into financial troubles and can’t make your payments, you could risk foreclosure and taking a hit on your credit.

Getting A Cash-Out Refinance For Your Second Home

A cash-out refinance can be a powerful tool to help you tap the equity you have in your home, including a second home. When you get a cash-out refinance, you borrow a new loan for more than your initial loan. Part of the loan goes to pay off your existing mortgage, and you get the rest in cash.

The money from a cash-out refinance can be used for nearly any purpose. You can use it to consolidate your debt, renovate your home or even make a down payment on an investment property.

Just make sure to consider what a cash-out refinance means for your loan repayment. When you refinance your loan in this way, you’re borrowing more than your initial mortgage balance. As a result, you can also expect to either have higher monthly payments or to extend your repayment term, meaning you’ll be in debt longer.

FAQs On Refinancing A Second Home

Before you decide to refinance your second home, read the answers to some of these frequently asked questions:

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

You can refinance a home that you earn rental income on. However, the requirements for refinancing a rental property are different from the requirements for a second home that isn’t a rental property. You could be subject to a lower LTV, a higher interest rate and stricter eligibility requirements.

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

Yes, you can use the money from a cash-out refinance to make the down payment on another home. In fact, a cash-out refinance can be an excellent way to pay for a second home or buy an investment property.

Are there alternatives to a cash-out refinance of my second home?

If you need cash but would prefer to avoid a cash-out refinance, you have other options. Some popular ways to get cash other than through a cash-out refinance include a personal loan, home equity loan and home equity line of credit (HELOC). Just remember, some lenders may not offer these loans. For example, Rocket Mortgage^® doesn’t offer HELOCs but does offer home equity loans.

The Bottom Line: Refinancing A Second Home Can Be More Challenging But Beneficial For Financial Goals

Refinancing a second home is quite similar to the process you took when you purchased the home in the first place. Refinancing can help you cash in on your equity, get rid of expensive mortgage insurance or lower your monthly payments.

If you’re considering refinancing your second home, apply to refinance your loan today to get the process started and see what interest rate you may be eligible for.