There are similarities between refinancing a mortgage in your main home and refinancing a mortgage in a second home or villa, or an investment or rental property, but there are some important differences in the requirements. Here’s what you need to know.
Why refinance your second home or investment property?
You may decide to refinance your second home or investment property to take advantage of low interest rates, change the term of your loan, or lower your monthly payments. If your property is valued highly, you can opt to refinance your cash-out to pay for renovations to your property or other expenses.
You will also refinance the following:
- Save interest money as you have improved your credit score
- Switch from adjustable mortgages to fixed rate mortgages
- Consolidate your main residence and second mortgage into one loan
Some investors may even use cash-out refinances to buy more property.
How to refinance a second home or investment property
There are two main ways to refinance your second home.
- Refinance fees and periods: Refinancing fees and term replaces your current mortgage with a new mortgage with a different interest rate, a different loan term, or both.
- Cash-out refinance: Cash-out refinance allows you to replace your existing mortgage with another large mortgage and pocket the difference between the two loans in your cash. The amount of cash that can be withdrawn is based on the stock level of the home and the lender’s requirements.
Preparing for refinancing your second home or investment property:
1. Understand your goals
Before you decide to refinance your second home or investment property, decide why you want to refinance. for example:
- Do you have a goal of lowering your monthly payments?
- Want to access stocks to pay other big expenses? (If so, do you know exactly what the costs are for those costs?)
The answer will guide you to the right type of refinance for your situation.
Generally, refinancing makes sense if you can lower your interest rates. However, if that’s the only goal, Refi may not be the best time. This is because the rates are higher than this year.
Also, keep in mind that refinances can revert the term of the loan to up to 30 years. If you were planning to pay back your investment property or second home earlier, you will need to refinance in a short period of time where you can increase your monthly payments, even with a lower balance or a lower rate.
2. Check if you are eligible
Determine if you meet the lender’s requirements in these areas.
- Equity, Loans and Value (LTV) ratio: To refinance, your home usually requires at least 20% of its shares, and sometimes more if it’s a second home or an investment property. Additionally, most lenders do not allow you to tap more than 80% of the home’s value with cash-out refinances.
- Credit score: Many lenders require a minimum of 620 credit scores, but the higher your credit score, the better your refinance rate. If your credit is good or not good, refinance may be giving you more attention than saving you money.
- Debt Income (DTI) Ratio: Your debt-to-revenue (DTI) ratio must be low enough that you can afford to buy a loan. If your income drops after your original mortgage approval, you may try this aspect.
- Cash preparation: Some lenders need to secure reserves equivalent to several months’ worth of mortgage payments.
3. Collect pre-approval documents
Similar to the steps to refinance a mortgage in a major residence, when refinancing a second home or investment property, you must provide documents such as a W-2, salary stub, bank statement, and previous tax returns. Lenders also seek information about their primary residence, other properties they own, and other assets, such as retirement accounts. The lender will review these documents and notify you of any prior decisions.
4. Get at least 3 refinancing quotes
Once you have your documents ready, you will be shopping with at least three mortgage refinancing lenders. Aside from differences in refinance rates, refi fees, guidelines and requirements may vary by lender. We recommend starting with your current lender and checking if you want to offer special discounts to the returner, but if you find a better offer elsewhere, you don’t need to work with that lender.
5. Pay the closing fee
Just like your main home, you will need to pay the closing costs with the second home refinance. These are often cheaper than the closing costs you paid when you purchased the property and usually include origination fees, valuation fees and credit check fees.
The difference between refinancing a second home and a major residence
- Refinancing a second home is risky. Since your second home or investment property is not the main residence you live in, in a pinch you are more likely to refrain from paying mortgages for your second home or investment property. Lenders compensate for this risk by charging higher interest rates and imposing stricter eligibility requirements.
- It’s difficult to qualify for a second home refinance. Many lenders have more stringent requirements to refinance their second home and investment property. Refinancing a second home or investment property may require more equity than a major residence. You may also need more cash at the reserve.
- Some lenders may be embarrassed. Many lenders don’t offer investment property loans, let alone refinancing their investment property, so options may be limited.
