Mortgage rates are at an all-time low, and this is a great time to refinance your second property if you have a vacation property or an investment house. This can cause your property to become more affordable, and you are able to borrow money at a historically low rate. When it comes to mortgage rates, a reduction of just one percent can be the difference of thousands of your dollars.
It’s not difficult to refinance your second property, but getting approved for your mortgage has become a lot more complicated than it was in the past. This is thanks to the housing crisis, and you can expect to provide a lot more information to your lender, such as tax returns, bank statements, or proof of your income. This is to ensure that you will be able to repay the loan over the allotted timeframe.
Higher Rates When Refinancing Second Homes
When you refinance your second property, interest rates will be higher than on your primary residence. They aren’t too far off though, and you may only pay about .25% more. That does add up, but it is far from an entire percentage point, which is what an investment property usually differs in.
There are always other factors to consider, such as fees and pricing adjustment, but in general when you choose to refinance your second property you will likely be paying slightly more in interest.
Home Equity is Essential
If you want to refinance your second property it is imperative that you have equity in it, and it should be at least 20%. This differs from the standard for primary residences, as people will often qualify for Federal Housing Administration loans to give them financing aid and provide them with equity requirements that are more lenient. If you don’t quite have 20% equity it may be difficult to refinance your second property, but it is possible. There are lenders that will allow a minimum of 10% equity, but you will likely pay a lot extra for the opportunity.
Second Home versus Investment Property
The cost between a vacation home and an investment property is very different, and there are very specific rules about what makes a house fall into which category.
- If the income you receive from renting the property is required to pay the necessary mortgage payment, it is considered an investment home. If you can pay your mortgage payments without the income from the house, then it is a second home.
- To be dubbed a second home, the property must be somewhat far away from your permanent home, usually at least fifty miles. If it is close, but is an obvious vacation spot (such as a beach or a ski resort), then it may be exempt from the fifty mile rule.
- If the house is ordinary and close to you, it will probably be considered an investment property, because there is no apparent reason that it would differ from your primary home.
- You will need to occupy the property at least once during the year in order for the home to be considered a vacation property.
- Second homes cannot be multiplexes since these are often rented, must be one unit, and no management companies may be involved in your property. They must also be obviously appropriate for occupancy all year.
Investment homes are a lot more expensive and are more of a challenge to finance. This is due to the fact that the income you receive from renting out the space is a factor in the mortgage qualifications. Should this income be interrupted, your mortgage payments will likely suffer. It’s also worth pointing out that people are less likely to feel attached to the rental property on the other side of town. They are far more likely to be deeply invested in the vacation property where they celebrate holidays and have family reunions. Because of these emotional ties, borrowers are not as likely to default on these properties.
Sometimes people who rent their homes out try to get around the law, and will buy the house as their primary residence. It is required that you report the cash you receive from renting out your investment property. It is also common for people to try to pass their investment home off as a vacation property. This isn’t as easy as it sounds, and the lenders will go as far as to examine your monthly bills and records to verify that it is indeed a second home.
If you are fortunate enough to have a second home, this is a perfect time to refinance your second property and you will be so glad you took advantage of these rates while they are still low. You could save thousands! It is unlikely that rates will remain this low, and it is such a great opportunity if you are in a position to take advantage of the benefits.