There are similarities between refinancing your primary mortgage and a mortgage on a second home or investment property, but there are some crucial differences in requirements. Here’s what you need to know about refinancing second homes and investment properties.
The basics of refinancing are the same
Whether it’s your first home or your third rental property, refinances usually hinge on the cost. If you’re doing a rate-and-term change, no matter what the property is used for, you need to make sure you’re saving enough money to make the refi cost-effective. If you’re doing a cash-out refinance, you need to make sure the new terms are suitable.
“Borrowers should always ask the pertinent questions about how much is the cost of the refi, how much will it take to recoup the closing costs,” says Julienne Joseph, former assistant director of government housing programs at the Mortgage Bankers Association. Evaluate the lender’s responses carefully to make sure the refinance will actually help you achieve your financial goals.
But there are some key differences
Even though the main goals of any refinance are the same, refinancing is more complicated if you own more than one property. Lenders consider non-primary residences to be riskier investments than a borrower’s main home, and investment properties are viewed as riskier still.
“With a primary residence, there’s less risk because the presumption is a borrower would make greater strides to preserve the roof that’s over their heads,” Joseph says. “If hardships were to happen, if there was a property they would allow to go into default, the primary residence is the one they’re least likely to do so.”
Many lenders have more stringent requirements for refinancing second homes and investment properties, and usually interest rates for those loans will be higher, as well. You may need more equity to refinance second homes and investment properties than you would for a primary residence. You might also need to have more cash in reserve.
With a secondary real estate refinance, you should pay extra attention to the break-even timeline because higher interest rates mean it will take you longer to recoup your costs.
Some lenders might shy away
Some mortgage lenders could focus only on certain loans, like primary mortgages, and turn away all other kinds of applications. That can make it harder for second-home owners — and especially real estate investors — to find a firm to refinance with.
“A lot of mortgage people don’t want to get into investment property loans because there’s so much detail that has to be done to them and so many roadblocks that the market puts up to get them done,” says Nancy Viejo, Florida regional loan officer at Top Flite Financial in Panama City Beach, Florida. “If a person calls and says they have six properties and want to buy number seven, that’s the worst nightmare for me, because we have to have everything they own in the application.”
The same goes for refinancing, says Viejo, who accepts applications from investors for refinances, but points out that there are extra regulations involved, and that those applications can be much more complicated. Fannie Mae and Freddie Mac limit the number of mortgages a single borrower can hold, and the applicants will need more documentation, because every property will need to be accounted for.
Once you find a lender, prepare for extra delays, especially if your application is going to be particularly complicated.
You should still shop around
As with any mortgage, it’s important to shop around. It’s crucial to make sure you’re getting not only the best rate, but fair closing costs and a reputable loan originator.
Check out Bankrate’s guide to finding a mortgage lender for more information about how to undertake your search.
If you’re unsure where to begin, it’s probably best to start with your existing lender to see if they have any better offers than your current mortgage. After that, you can search for second home and investment property refinancing offers online, or consider reaching out to a mortgage broker if you’re having trouble finding a good deal on your own. Portfolio lenders may also be able to write your mortgage.
While refinance rates aren’t as attractive as they were a year ago, many borrowers still have an opportunity to save. It’s a little more complicated if you’re trying to refi a property that isn’t your primary residence, but that doesn’t mean you can’t benefit if you do your homework. Shop around, find a mortgage that suits your needs and financial goals and crunch the numbers to make sure it really makes sense to go through the hassle of a refinance. If all those indicators point in your favor, you could realize long-term savings.