Personal Finance

Refinancing a Vacation Home

Betsy Vereckey, The New York Times
Row of beach houses
Erik Von Weber | Stone | Getty Images

Homeowners who want to take advantage of historically low mortgage rates and refinance a vacation home should be prepared for stricter loan requirements, especially if they rent out the property.

Lenders typically consider such loans riskier. “In the event of a fiscal problem,” said Keith T. Gumbinger, a vice president of HSH Associates, a financial publisher in Pompton Plains, N.J., “a homeowner with a primary and secondary residence is far more likely to continue to make payments on the home they live in, rather than the one they visit occasionally.”

Mr. Gumbinger notes, too, that homeowners are less likely to maintain a second home as they do a primary residence, which might affect the home’s value and could mean greater expense for the lender should the property end up in foreclosure.

In addition to charging a higher rate, lenders may require a lower loan-to-value ratio, which is the percentage of a property’s value that is mortgaged.

For a primary residence, a borrower can have a ratio as high as 95 percent, but on a second home or an investment property, the maximum ratios are 90 percent or 85 percent, according to Matt Hackett, an underwriting and operations manager with Equity Now, a direct mortgage lender based in New York City.

Lenders may also require a higher minimum credit score — for instance, 700 to 720, said Mark Logue, the president of Thoroughbred Mortgage in Rye Brook, N.Y.

And they will want to see ample liquidity. Expect to have on hand, for instance, two months’ worth of funds to cover mortgage principal and interest, the property taxes and insurance.

If you’re planning to rent out the property, it changes category and becomes an investment property — and for that, you’ll need to show six months’ worth of funds in your bank statements, Mr. Hackett said. Lenders will want to ensure that there is a cushion should there be problems with future rent payments.

During the past year, foreclosure rates on investment properties were around one and a half times higher than on second homes not being used as investment property, according to CoreLogic, a real estate analytics firm.

Mr. Logue says rates for second-home refinancing are typically about a quarter of a percentage point higher than those for primary residences, which is “not significant, but there is a difference to cover the risk.”

But if you rent out your second home for over two weeks out of the year and report that income on your tax returns, most lenders will treat that home as an investment property, said Daniel Gualtieri, a vice president in the Hamptons division of GFI Mortgage Bankers.

“There goes your chance to get a low Fannie or Freddie rate,” he said, “because you’re showing the house not as a second home anymore. You’re showing it as a rental property.”

Investment properties will often carry higher rates, or more points, based on their loan-to-value ratio, Mr. Hackett said. For instance, for loan-to-value ratios up to 75 percent, a borrower can: pay points totaling 1.75 percent of the loan amount; pay a slightly higher rate instead of points; or combine the two (a 25 percent higher rate and 75 percent payment in points).

Those planning on renting out a property after refinancing should disclose that information to the lender beforehand. Otherwise, said Jude Coard, a tax partner at accounting firm Berdon L.L.P., “if they see you rented out the property, you may be in default of the mortgage.”

But Melissa Cohn, the president of the Manhattan Mortgage Company, added: “In today’s marketplace, every bank has different guidelines as it relates to the second home. It really depends on the type of bank that you go to.”

Some lenders, for instance, don’t consider a home an investment property if it’s rented out for only a season each year.