This article will help you understand the details for a second home refinance and how you can prepare before filling out an application.
When most people think about mortgage refinancing, they usually think about primary homes. But whether it’s your first property, an investment rental, or your cherished family beach house, refinancing is always possible.
As long as you work with the right mortgage team, you can refinance just about any property, including your second home.
With second home refinancing, the process has many similarities, but also some key differences. Understanding these differences, and being prepared for the process, will help you get the best possible “refi” on your second home.
Second Home Refinancing: What You Should Know Before Applying
The Basics are, Basically, The Same
From a broad-level, bird’s-eye perspective, refinancing for your primary and secondary home are the same. It all comes down to the cost; whether you are refinancing for a better rate or terms that better fit your needs, you must make sure that the benefits of refinancing outweigh the costs.
The exact numbers will vary significantly, and there are many variables that will change, but the first aspect you need to consider is the cost of refinancing. Then you’ll want to consider the cost savings from getting a better interest rate and compare the two. This can help guide your decision.
Just like a primary home, refinancing is usually better if you have lots of time left on the mortgage and a high interest rate compared to today’s current rates. But if you only have a few years left, or your interest is not significantly higher than current rates (or both), refinancing may not be worth the costs.
The Differences
The fundamentals are the same, but some of the details are different. Mortgages on secondary homes are riskier. (Or, at least, they are perceived by lenders to be riskier.) This is because homeowners will do more to protect their primary residence, the home where their family lives, than their secondary home, which is often property hundreds of miles from where they live. Think about it: if a borrower defaults on their primary house, they could lose the family home. If they default on a secondary mortgage, they could lose the vacation property; that’s not good, but losing the family home would be much worse.
Most lenders have stricter requirements for second mortgages. They also have stricter requirements for refinancing a second home. Again, the details will vary, but you’ll likely need more equity in the property, a higher credit score, and a (possibly) more cash in reserve.
Finding a Lender Willing to Do a Second Home Refinance Can be Difficult
Another important difference is the availability of second home refinance services. While virtually every lending and mortgage office can support financing of a primary residence, fewer are willing or able to support second mortgages. Even fewer still do refinancing for second homes.
In many cases, this simply has to do with the complications of second mortgages. Many borrowers simply don’t want to get involved in the complexities of second home refinancing, so they avoid it altogether. These loans and the refinancing processes can take time, often clogging up an already over-booked mortgage office. Finding a team that can, and will, work on these refinances is often more challenging.
Tips for Securing a Refinance on Your Second Home
Prepare to Verify the Property Status
When you purchased the second home with a mortgage, you likely went through a gauntlet of steps that all but guaranteed the property being purchased is a second home and not a primary house or an investment property. Unfortunately, you’ll have to go through many of the same steps all over again.
Mortgage lenders need to provide sufficient evidence that it is a second home or vacation property, and they do this through information verifying this little fact. They may request information on how much you occupy the house, or whether it has been converted into a multi-unit property, which is an indication of an investment property and not a straight vacation home.
Also, you will need to verify that you completely own the property, outside of the original mortgage of course. Basically, they will confirm that no outside parties, such as other lenders, contractors, or investors, have a legal claim to the property.
All of this verification may seem like a hassle, but rest assured that it’s in your best interest. A second home will get the benefit of better terms compared to investment properties, so it’s worth your time to prove that it’s not an income-generating home.
Save for Cash Reserves
Because of the risks, lenders want to know that you can cover mortgage payments on a second home in the event of financial hardship. They often do this through the use of cash reserves. “Cash reserves” is simply money held in savings that can be used to make payments if something were to happen with your income, such as lost wages or large medical bills.
In most cases, you’ll need about two months worth of cash reserves, although this amount could be more depending on you specific loan. It’s not unheard of for lenders to require as much as a years’s worth of mortgage payments.
Know Your Equity, DTI, Interest, and Other Factors Before Applying
Before making the application, it helps to research a few different factors that will impact your chances of approval. These include your equity, your debt-to-income ratio (or “DTI”) and the interest on your current loan.
Having this information upfront will save time and help you get a better understanding of whether a second home refinance would be right for you. For example, you should re-examine the specific interest on your loan so you are absolutely certain about whether or not you will benefit from refinancing. With this information, you can be a more confident applicant for a second home refinance.
The Service You Deserve for Any Refinance
We are proud to offer outstanding service on a second home refinance. Contact our team today and let us help you make the right choice on your next mortgage!
