If you own a vacation home, there are a variety of reasons why you might decide to refinance the mortgage at some point. Perhaps, market interest rates are much lower now than when you bought and you believe you could save money with a lower rate. Or maybe you have considerable equity in your vacation property and you want to cash out some of that value for other investment projects. Or it could be you want to refinance out of your original variable-rate mortgage into a more predictable fixed-rate loan. In any case, refinancing a vacation home requires a few extra considerations than with a traditional primary residence mortgage. Here’s what you need to know:
The Vacation Home Refinance Process
- Prove Your Vacation Home Status - There are legal and tax ramifications to whether your place is a vacation home or a rental property. The IRS considers a second (or vacation) home one in which you personally live for 14 days or more during the tax year, or 10% of the days that you would have otherwise rented it out, whichever is greater. The home also needs to be a single-unit dwelling with no rental or time-sharing arrangements. In some cases, you can still claim your property as a vacation home even if you earn rental money on it as long as you do not use that income to help you qualify for the refinance.
- Gather the Required Documents - Just like with a traditional refinance, you will need to provide important financial documents, including your federal tax returns, W-2s, or 1099s from the previous two years. You will also likely be required to share two-years’ worth of bank statements to show how much cash reserves you have. If you receive any other outside sources of income like child support or income, you’ll need paperwork documenting the payment for the past six months.
- Run Your Own Credit Check - Lenders often use your credit score as a major determining factor on whether to lend to you and how much. You can avoid any unpleasant surprises by pulling your credit scores first from all the major credit bureaus. You are allowed to do this for free once every 12 months and it will not affect your score. Once you know your score you might decide to wait and take steps to improve it before you apply. If your score is good enough, you can get a good idea of what kind of interest rate you will be offered. You might find that rates are slightly higher than on primary residence mortgages due to the increased financial risk.
- Check Your LTV Ratio - In general, you’ll need more equity in your vacation property to refinance than you would with your primary residence. For a cash-out refinance you can have no more than a 75% loan-to-value ratio, but with other types of refis you can often go up to 90% LTV.
Refinancing your second home may require a few extra steps than refinancing your main home, but it is not difficult and the benefits can be just as profitable for you!