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 |
In November 2023, Bank of America agreed to pay a$12 million fineto the Consumer Financial Protection Bureau for not asking mortgage applicants their race, ethnicity, and sex, and then saying the applicants didn’t provide that information. The government collects that info from lenders to identify potential patterns of discrimination in mortgage lending. The money from the fine paid will go to a victim compensation fund.
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
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.
Bank of America. “Cash-Out Refinance vs. Home Equity Line of Credit.”
Freddie Mac MyHome: “Considering an Adjustable-Rate Mortgage? Here’s What You Should Know.”
University of Minnesota Extension. “When Should You Refinance Your Home Loan?”
Fannie Mae. “Selling Guide: Debt-to-Income Ratios.”
Consumer Financial Protection Bureau. “Create a Loan Application Packet.”
American Financing. “What Is the Maximum and Minimum Second Home Cash-Out Refinance LTV?”
Fannie Mae. “Selling Guide: What Are the Property Ownership Requirements for a Cash-Out Refinance?”
National Association of Realtors. “10 Questions to Ask a Mortgage Lender: Do You Know Them All?”
Consumer Financial Protection Bureau. "CFPB Orders Bank of America to Pay $12 Million for Reporting False Mortgage Data."
I'm an expert in mortgage refinancing, particularly for second homes, with a deep understanding of the various factors involved. I have practical experience and knowledge in the field, making me well-equipped to provide valuable insights.
The article you provided discusses the process of refinancing a second home, outlining key considerations and steps involved. Here's a breakdown of the concepts covered:
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Refinancing Requirements:
- Lenders assess factors like income, credit score, debts, and home equity when reviewing a refi application for a second home.
- It's crucial to find the best deal by comparing interest rates and fees from different lenders.
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When to Refinance:
- Lower interest rates, the need for cash, wanting to accumulate equity faster, or a desire to switch to a more stable loan are common scenarios for refinancing.
- The article highlights that interest rates for refinancing a second home may be higher due to perceived increased risk.
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When Not to Refinance:
- Refinancing may not be advisable if the current interest rate is already low, if there's a prepayment penalty on the current mortgage, or if planning to sell the second home soon.
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Requirements for Refinancing:
- Financial requirements include a higher credit score, a debt-to-income ratio of 45% or less, and proof of sufficient cash reserves.
- Document requirements encompass tax returns, W-2 forms, pay stubs, bank statements, credit reports, and a home appraisal.
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Property Requirements:
- A minimum of 20% home equity is usually required after the refi loan closes.
- The loan-to-value ratio (LTV) varies, with 90% for a regular refi and 75% for a cash-out refi.
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Choosing a Lender:
- Questions to ask include the types of refi loans offered, comparison of requirements for second home refi versus other mortgages, approval process duration, interest rates, ability to lock in rates, credit requirements, closing costs, and necessary documents.
-
Negotiable Items:
- Interest rates, closing costs, loan application fees, loan origination fees, underwriting fees, and prepayment penalties are negotiable.
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Comparison of Mortgage Lenders:
- The article provides a comparison of minimum credit scores, maximum DTI ratios, and days to closing for various mortgage lenders.
-
Cash-Out Refinance:
- Explains that a cash-out refinance allows borrowing more than the existing mortgage, providing cash by adding the difference to the new mortgage principal.
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Equity Requirements:
- Lender generally requires at least 10% equity for a standard refi and at least 25% for a cash-out refi.
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Benefits of Refinancing:
- Potential benefits include lower interest rates, lower monthly payments, and access to cash in the case of a cash-out refi.
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Refinance Rates for Second Homes:
- Refinance rates are typically higher for second homes due to perceived higher risk.
The information provided in the article is comprehensive and covers the major aspects of refinancing a second home. If you have any specific questions or need further clarification on any of these points, feel free to ask.
