How to refinance a second home or investment property

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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. Before you embark on refinancing your second home or investment property, here’s what to know.

What is a second home vs. investment property?

In simplest terms, a second home is a property you live in for part of the year, typically used for vacations. An investment property, or rental property, is a property you rent out to generate income. One key difference between a second home and an investment property is how much time you spend in it. For tax purposes, a second home is considered an investment property if you live in it for 14 days or fewer per year, or less than 10 percent of the days you rent it out per year.

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 the home’s level of equity and the lender’s requirements.

To prepare for refinancing a second home or investment property:

1. Understand your goals

Before deciding to refinance your second home or investment property, determine why you want to refinance. Is your goal to lower your monthly payments or access equity to pay for other large expenses? (If it’s the latter, do you know exactly how much those expenses cost?) This impacts which type of refinancing you might choose.

Keep in mind, too, that refinancing could extend the loan term back out to as much as 30 years. If you were planning to pay off your investment property or second home sooner than that, you’ll need to refinance to a shorter term, which could increase your monthly payments, even if you’re refinancing a smaller balance than what you started with.

2. Check if you qualify

You’ll need to meet credit score and loan-to-value (LTV) ratio requirements to get approved for a refinance. Many lenders require a minimum 620 credit score to apply for a second home cash-out refinance, but the higher your credit score, the better interest rate a lender will offer you. If your credit isn’t good or excellent, refinancing might end up costing you more in interest rather than saving you money.

You’ll also need at least 20 percent equity in the home. This is typically required for a rate-and-term refinance, and most lenders don’t allow you to tap more than 80 percent of your home’s value in a cash-out refinance.

3. Gather preapproval documents

Similar to the steps to refinance your primary residence, when refinancing a second home or investment property, you’ll need to provide documents such as W-2s, pay stubs, bank statements and previous tax returns. The lender will also want information on your primary residence and any other properties you own, and other assets like retirement accounts. The lender will review these documents to inform its preapproval decision.

4. Get at least three refinance quotes

Once you have your documents prepared, shop around with at least three mortgage refinance lenders. Aside from differences in refinance rates, the refi fees, guidelines and requirements can vary by lender. You might want to start with your current lender to see if they offer any special discounts for returning borrowers, but remember: You don’t have to work with that lender if you find a better offer elsewhere.

5. Pay closing costs

Just like with your primary home, 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, and typically include an origination fee, appraisal fee and credit check fee.

Reasons to refinance your second home

You might decide to refinance a second home or investment property to take advantage of a lower interest rate, modify your loan’s term or lower your monthly payments. If the property has appreciated in value, you could opt for a cash-out refinance to pay for renovations to the property or other expenses.

You might also refinance to:

• Consolidate your primary residence and second home mortgages into one loan
• Save money on interest because you’ve improved your credit score
• Switch from an adjustable-rate mortgage to a fixed-rate mortgage

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

Differences between refinancing a second home vs. primary residence

Although the main goals of any refinance are the same, refinancing is more complicated if you own more than one property. Here are some key differences:

• Second property refinances are seen as riskier: Lenders consider non-primary residences riskier investments than a borrower’s main home, and investment properties are viewed as riskier still.
• Qualifying is tougher: 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 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 reserves.
• Some lenders might shy away: Many mortgage lenders aren’t interested in investment property loans, let alone investment property refinances. Because of this, you might have limited options.

FAQ on refinancing a second home

• 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. You can also use that income to qualify for a refinance, as long as you’re properly documenting it on your tax returns.
  

• 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 interest rates.