How is a mortgage different for a second home?

Thousands of Americans purchase a second home every year and more than half of all second homes in the United States are financed with a mortgage.

In this post, we’ll cover what’s different about a second home mortgage and discuss strategies that make owning another property more affordable than you might think.

What qualifies as a second home?

First, it’s important to clarify the difference between a second home and an investment property. Lenders treat loans differently, depending on what you plan to do with the home. An investment property is real estate you purchase with the primary intent of generating income, whereas a second home is mostly meant to be used by you or your family and friends.

Different lenders use slightly different parameters to determine which category your purchase falls under, but generally speaking a second home must:

• Be located a reasonable distance from your primary home, say fifty miles or more
• Only have one unit (for example, a duplex would not qualify as a second home)
• Be occupied by you at least part of the year and remain available for your use more than half of the year
• Not be under the control of a property management company

It’s OK to rent out your second home to help offset the cost, but you’re only allowed to offer short-term rentals and mustn’t have the property occupied by renters more than half of the calendar days of the year.

How to qualify for a second home mortgage

Qualifying for a second home mortgage is typically more difficult than qualifying for the first one. With two monthly mortgage payments to cover, underwriters will need to be extra sure you can afford both loans. Many lenders require a minimum of 20% down on a second home and minimum credit score requirements will be higher. You’ll also need to eliminate or lower all your non-primary mortgage related debt prior to applying.

Leveraging equity in your current home to purchase a second home

Coming up with 20% of the purchase price doesn’t have to be difficult. Lenders will allow you to utilize the equity in your primary home in order to meet down payment requirements.

The three strategies you can use to pull cash out of your first home are:

• Cash-out refinancing
• Home equity loan
• HELOC (Home equity line of credit)

What are the interest rates like?

Interest rates for second home mortgages are lower than you typically pay for an investment property but higher than what you pay for a primary home loan. However, with interest rates at record lows, second home mortgages are currently more affordable than ever.

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