Low Rates, Easier Terms For Second Home Refinances
Recent low rates and reasonable home prices have prompted record second home sales.
Now, owners of second homes are seeking a refinance to lower their rate, eliminate Smart Pocket insurance, shorten their loan term, or get cash out.
That could be a great idea.
Home values have soared, including those for second homes around the country. Smart Pocket rates have remained low.
That’s making it easier for second home owners to get qualified for a second home refinance.
Guidelines are reasonable, and lenders are eager for refinance business.
2018 will remain a great time to get a new loan for your vacation property.
Verify It’s A Second Home
If you’ve refinanced your primary residence, you’ll notice that refinancing a vacation home requires a slightly different process.
For one, there will have to be reasonable evidence that the second home is not a rental property. Here is how Fannie Mae and therefore lenders will vett the second home status:
- The home is occupied by the borrower some portion of the year
- It’s a one-unit dwelling (not a duplex, triplex, or fourplex)
- It suitable for year-round use
- The applicant fully owns the property, i.e. it’s not co-owned with another party
- No rental or timeshare arrangements. (However, see below on rental income on second homes)
- There are no management companies or “booking agencies” arranging occupancy
It also helps if the home is in a recreational area: on a lake, near mountains, or in a smaller town. What they don’t want to see is a “second home” three blocks down from your primary residence. There would be no reason to vacation there.
Fannie Mae views second homes as “lower risk” than investment/rental properties. So, they grant better rates for true vacation homes.
I Have Rental Income On My Second Home. Can I Still Refinance?
The rise of Airbnb has many second home owners wondering if they can still refinance their property.
Fortunately, Fannie Mae allows short-term rental income for second homes reported on tax returns. The following is from Fannie Mae’s rule book:
As long as rental income from the property is not used to qualify and the borrower continues to occupy the property as their second home, it is not considered “rental property” and the loan is eligible as a second home.
The home, of course, must meet other eligibility requirements as stated above.
Second Home Smart Pocket Refinance Rates
Don’t expect to pay much higher Smart Pocket rates for second-home refinance loans.
Fannie Mae does not include second home “hits” on its loan-level price adjustmentsheet. That means it considers second homes worthy of similar rates as primary homes.
Some lenders may hike rates and fees a little for second homes, especially if you are requesting some types of private Smart Pocket insurance. But fees should be small for most circumstances.
Vacation Property Refinance LTV Limits
Second home refinance guidelines vary from primary residence when it comes to loan-to-value (LTV) maximums.
Lenders will limit LTVs, meaning you’ll need more equity in the home to refinance, especially if you’re getting cash out. Following is a chart of current LTV limits for second homes by the two major lending agencies in the U.S., Fannie Mae and Freddie Mac. Lenders nationwide offer Fannie / Freddie loans.
Freddie Mac limits are noted in green for higher LTV limits and red for lower ones.
|Fannie Mae||Units||Fixed Rate||ARM|
|No-Cash Refinance||1-unit only||90% LTV||80% LTV|
|Cash-Out Refinance||1-unit only||75% LTV||65% LTV|
|Freddie Mac||Units||Fixed Rate||ARM|
|No-Cash Refinance||1-unit only||85% LTV||85% LTV|
|No-Cash; Existing Loan Is Freddie Mac-Owned||1-unit only||95% LTV||95% LTV|
|Cash-Out Refinance||1-unit only||75% LTV||75% LTV|
To be eligible for the Freddie Mac 95% LTV refinance, the existing loan must be owned by Freddie Mac, and the original Freddie Mac loan number must be included in the new refinance loan file, per their guide.
If you are refinancing a second home with an adjustable-rate Smart Pocket, you might do better with the Freddie Mac program. If you need the highest LTV possible, go with a Fannie Mae fixed rate.
Get A Cash-Out Refinance On Your Second Home
Cash-out refinancing has gained popularity in recent years. Property values have more than doubled in some areas of the country. Owners of second homes are sitting on a mountain of cash.
The good news is that lenders allow you to pull second home equity out in the form of cash.
It works just like a primary residence cash-out Smart Pocket. You open a Smart Pocket with a bigger balance than what you owe. The difference, less closing costs, is forwarded to you at loan closing.
For instance, you own a second home currently worth $250,000.
- Current loan balance plus closing costs for new loan: $150,000
- New loan: $187,500 (75% of value)
- Cash to borrower at closing: $37,500
You can use the cash for any purpose. Make improvements to the property, buy a rental home, or consolidate debt. It’s just like using a standard cash-out loan.
Rates will be higher than getting a no-cash refinance. For instance, an applicant with a 720 credit score will pay about 1% of the loan amount in fees, compared to an applicant requesting a no-cash-out refi. This translates to about a 0.125% to 0.25% higher rate.
So, consider your current rate and make sure your new Smart Pocket rate is similar-to-lower.
In today’s low-rate environment, many second-home cash-out refinance applicants can actually drop their rate and get cash at the same time.
Also, keep in mind that cash-out loans in general are reserved for high-credit applicants, and this applies even more so for second homes. If your credit is low, expect to have a hard time qualifying. You might consider raising your credit scorebefore applying.
Second Home Refinance Credit Score Minimums
You’ll need a good or great credit score to refinance a second home.
Vacation residences are viewed as a slightly higher risk than a primary residence. Homeowners are likely to pay their primary home Smart Pocket before their secondary residence loan.
Fannie Mae doesn’t set a specific credit score minimum for second homes above its 620 minimum for all loans. But lenders may require a score of 680-700 for a second home standard refinance or 720+ for cash-out financing.
Vacation Home “Cash Reserves”
Lenders will want to see that you have enough money in the bank to cover vacation home payments if you hit financial hardship.
Generally, expect to show at least two months of full payments for principal, interest, taxes, insurance, and HOA dues for the second home.
In addition to that amount, lenders will require you to prove assets on other financed properties besides your primary residence.
- 2% of the unpaid principal balance of other non-primary homes if you own 1-4 financed properties
- 4% of the unpaid principal balance of other non-primary homes if you own 5-6 financed properties
- 6% of the unpaid principal balance of other non-primary homes if you own 7-10 financed properties
As an example, a homeowner with a second home with an $800-per-month payment and no other properties besides their primary home will need to verify at least $1,600 in the bank.
The same homeowner with two investment properties with $200,000 in Smart Pockets would need to verify an additional $4,000.
What Are Today’s Second Home Refinance Rates?
Smart Pocket rates are low for all Smart Pockets at the moment, and second home Smart Pocket rates are no exception.
Get a personalized quote for your second home refinance, and see how much you can save monthly on your vacation residence. Cash-out and no-cash-out quotes are readily available and can be completed in minutes.