How to refinance your second home: 2021 guidelines, rates, & cash-out rules

Tim Lucas
The Mortgage Reports editor

Low rates, easier terms for second home refinances

Recent low rates and reasonable home prices have prompted record second home sales.

Now, owners are seeking to refinance a second home to lower their rate, eliminate mortgage 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. Mortgage rates have remained low.

That’s making it easier for second homeowners to get qualified for a second home refinance.

Guidelines are reasonable, and lenders are eager for refinance business.

2021 will remain a great time to get a new loan for your vacation property.

Get started on your vacation home refinance here. (Oct 15th, 2021)

In this article:

To refinance a second home:

  • You must provide reasonable evidence that the second home is not a rental property.
  • If you rent your home out part-time through a service like Airbnb or VRBO, it might still qualify as a vacation home
  • You shouldn’t expect to pay much higher mortgage rates for second-home refinance loans.
  • Lenders will limit loan-to-value (LTV) maximums on second homes, meaning you’ll need more equity in the home to refinance.

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 vet 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.

Verify your new rate (Oct 15th, 2021)

I have rental income on my second home. Can I still refinance?

The rise of Airbnb has many second homeowners 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 rulebook:

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 mortgage refinance rates

Don’t expect to pay much higher mortgage rates for second-home refinance loans.

Fannie Mae does not include second home “hits” on its loan-level price adjustment sheet. 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 mortgage 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 mortgage, 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 mortgage. You open a mortgage 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 mortgage 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 score before applying.

Verify your second home refinance eligibility. (Oct 15th, 2021)

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 mortgage 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 a $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 mortgages would need to verify an additional $4,000.

What are today’s second home refinance rates?

Mortgage rates are low for all mortgages at the moment, and second home mortgage 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.

Verify your new rate (Oct 15th, 2021)