How to refinance a vacation home

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There are a few key differences that make refinancing your vacation home a little more difficult than refinancing your primary residence. (iStock)

Refinancing a vacation home has the same benefits as refinancing your primary residence – it can help you save on interest charges or lower your monthly mortgage payment.

But the refinancing process is different for a vacation home. The mortgage interest rate on your second home may be higher than the rate you pay for your primary residence. And there may be tax consequences to consider.

Can I refinance a vacation home?

In most cases, you can refinance a vacation home. There are many benefits to refinancing a vacation home, including:

  • Allowing you to withdraw equity from the property to consolidate your debts
  • Shorter term refinancing to reduce total interest charges
  • Converting a variable rate mortgage to a fixed rate loan
  • Get a lower interest rate than your current mortgage

If you’ve ever gone through the refinancing process with your first mortgage, you’ll find it to be very similar. The main difference is that you will have to prove that your vacation home is not a rental property.

Secondary residence or rental property?

Lenders consider a vacation home to be a second home in which you live for at least part of the year. It can be months at a time or on weekends. It is a property that is primarily used by you, the owner. On the other hand, a rental property is property that belongs to you but which is occupied by a tenant, who pays rent. The tenant can either be long term or rent for a short period while on vacation.

Although it is not necessary, you can earn passive income from a rental property. Since lenders see second homes as “less risky” than real estate investment properties, they will likely give you a better interest rate if you have one. It is therefore important that you can prove that your vacation home is in fact a second home rather than a rental property.

When you are ready to refinance your vacation home, you can research the rates of several lenders with Credible.

How to refinance a vacation home

The steps to refinance your vacation home are similar to those you would take to refinance your primary residence, with a few important differences. Here is what you need to do.

Make sure you have a vacation home

The IRS has specific guidelines for what qualifies as a vacation home versus rental property or real estate investment, which mortgage investors Fannie Mae and Freddie Mac also follow. For a house to be considered your second home, you (the borrower) must live in it for 14 days in the tax year or 10% of the days you would otherwise have rented it for its fair share. rental value, whichever is greater.

Check your credit

If your credit score has improved since you first bought your vacation home, you may be able to qualify for a lower interest rate. Before you begin the refinancing process, check your credit report and credit score so you know exactly where you stand. If you notice any inaccuracies or errors in your report, dispute them immediately.

Gather paperwork

To refinance your vacation home, you will need to share a number of documents with the lender. These can include your federal, W-2, and 1099 tax returns from the past two years. If you are receiving child support or alimony, you will need legal documents showing that the payments have been made for at least six months and will continue for at least three years.

Shop around and choose a lender

Do your research and look for several lenders who offer refinance for vacation homes. Read the reviews and compare the pros and cons of each option. This can help you get the best rate, deal, and find a reputable lender.

Read the fine print

Some lenders may charge a fee for refinancing your vacation home. These expenses may include escrow fees, appraisal fees, private mortgage insurance fees, and origination fees. Once you have a lender in mind, make sure you know what these fees are to avoid unwanted financial surprises down the road.

Wait for approval and close

Once the lender approves and finalizes your loan, they will send you the closing information for you to review and sign. Be patient, as this can take a while depending on the lender you choose and the time of year you apply.

Credible can help you compare mortgage refinance rates from several lenders.

Second home refinancing rate: what you need to know

The refinancing rates for second homes are generally a little higher than those for primary residences. The higher interest rates are due to the fact that lenders believe that if you run into a financial hurdle, you are more likely to stop paying your second mortgage than your primary residence.

However, if your credit is good, you may be able to refinance at a rate lower than your current mortgage rate.

Rates vary from lender to lender, so it’s important to shop around.

Credit, reserves and other requirements for refinancing a second home

A few other factors make refinancing a vacation home different from refinancing a primary residence.

First, while some mortgage programs are available for people with low or low credit, you will likely need a good credit rating to refinance a vacation home. Lenders may also require that you have at least 10% of the equity in the home – a loan-to-value ratio (the amount you hope to borrow over the appraised value of the property) of at least 90%.

Typically, the lender will ask you to show at least two months of reserve for your vacation home, which means you have the money in the bank to pay off your mortgage for two months if you were to lose your job or face another financial difficulty. If your payment is $ 1,000 per month, for example, you will need to prove that you have at least $ 2,000 in the bank.

Advantages and disadvantages of refinancing a vacation home

As with any financial decision, refinancing a vacation home has its pros and cons.

Benefits

  • Take advantage of lower interest rates. With a lower interest rate, you can take advantage of lower monthly payments. This can free up money and leave you with more money to pay off debt, save money, or make improvements to your vacation home.
  • Reduce the long term cost of the mortgage. If you are able to get a lower interest rate, more of your payments will go towards paying off the principal. You could save thousands of dollars over the life of your mortgage. But if you refinance for a longer term – say for a 30-year mortgage from a 15-year mortgage – the total cost of your loan will likely increase.
  • Get the money. As long as you have equity in your vacation home, you can opt for cash refinancing. You will replace your current mortgage with a new one for more than what you owe on your home. You can make the difference towards other financial goals.

The inconvenients

  • May increase your mortgage payment. If you withdraw funds or refinance for the longer term, your mortgage payment will likely increase. Paying more money can keep you from paying more bills and reaching your financial goals.
  • It can be difficult to qualify. Most lenders who refinance a vacation home require a higher minimum credit score. If you don’t have the best credit score, you may not be approved for refinance.
  • Closing costs can be high. Refinancing costs and closing costs can add up very quickly. That’s why it’s a good idea to do the math and make sure you save money with refinancing.

When you’re ready to refinance your vacation home, compare the rates of several lenders through Credible to help you find a competitive mortgage rate.

About Gene Schafer

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