Mortgage Rates for Second Home vs. Investment Property

There are many questions about second home vs. investment property mortgage rates, but we’re here to answer them. 

Mortgage rates for rental properties or second homes are higher than primary residences. However, there is less risk in buying a second home as opposed to an investment property. But that doesn’t mean there aren’t costs you need to consider. 

Any real estate investor needs to know how their second home mortgage rates will compare with those for other types of loans. By comparing second-home mortgages and investment property mortgages, you can learn more about whether purchasing one or the other is worth it.

Buying a second home to rent to others can be an excellent investment. The question is, what’s the better investment: a second home or a rental property in a prime location? How do mortgage rates for second homes compare to those for investment properties? 

Below, we’ll answer all these questions and more so that you can decide what is best for your financial future.

Second Home vs. Investment Property: What Is The Difference?

It is easy to differentiate a second home from an investment property. Think of your second home as your supplementary residence after your main home. But what distinguishes both properties is occupancy and whether or not you make money from them. 

This may be tricky if you want to rent the property now and then. For instance, you might frequently use the property for vacations while also listing it on Airbnb for a portion of the time you’re not using it.

However, even though your home may generate some income, it is not necessarily an investment. How long you stay there will determine how you can define the property. You must vacation at your second home at least 14 days out of the year. It does not need to be consecutive days. These 14 days are meant for the people on the loan of the property and/or the title. 

Think of a second home like a vacation home—one you use on fun occasions or during holidays. Then think of an investment property as one that you want to rent out to make money.

Second Homes 

As the name implies, a second home is a property whose primary purpose is adding to your primary home. Second homes are unlike rental properties you buy with the sole intention of renting out. 

According to the IRS, a property is a second home if you occupy it for at least 10% of the time it’s rented out or if you occupy it for over fourteen days in one year. 

However, any investment yield is not taxable, and you are not permitted to deduct expenses if you occupy the property for that long.

Investment Properties 

A home you purchase intending to only rent out is an investment property. Single-family and multifamily buildings with up to four units qualify as investment properties.

From understanding the implications of purchasing a second home or investment property to locating the best rental properties for sale, you’re already dealing with a lot. Even if you have these all figured out; you still need the best mortgage loans available to ease into financing your new property. 

The Mortgage Shop, LLC can help with that! Whether for short-term or long-term rentals, vacation properties, or second homes, we can make the mortgage application as easy as possible. 

Our team boasts over a decade of experience providing friendly mortgage rates for your needs, coupled with our vast knowledge of various property markets.

Mortgage Rates for Second Home and Investment Property 

Second-home and investment property mortgage rates are more significant than they are for your primary residence.

Rates for investment properties are typically 0.5 – 0.75% higher than current rates. However, you can get reasonable rates that are only slightly higher than your primary home. 

Second Homes Mortgage Rates

Typically 0.50% or less than your principal home rate.

Investment Property Mortgage Rates 

0.50% to 0.75% is more expensive than your principal residence rate.

The same factors that affect primary house mortgage rates also affect second homes and rental properties. Your rates will differ depending on the current market, salary, credit score, where you live, and other variables.

Also, your current mortgage rate may differ if your financial circumstances have changed since you purchased your first house.

Mortgage Requirements for Second Home and Investment Property 

If you’re planning to finance a second home or invest in a rental property, you should expect different mortgage requirements from your lender. Mortgage lenders often require a second home to be a 1-unit property that isn’t subject to a leasehold requirement and is at least fifty miles from your principal home.

Even if you’ve only owned your home for a short time, the mortgage requirements for a second home and investment property will differ. You must put down a higher amount of money and have a higher credit score than a primary residence buyer. 

Requirements and Mortgage Rates for Second Homes 

Here is what you should know about mortgage rates and requirements for a second home.

Down payment of at least 10% 

For a second property, several lenders need a 10% down payment. Additionally, you could pay 20% or more if you have a worse credit score or fewer financial reserves.

Interest rates are a bit above average. 

Because a second house is not a principal home, lenders view it as a higher-risk transaction and demand higher borrowing rates. Although not as high as interest rates on an investment property.

A minimum credit score of 640

Usually, 640 or higher, good credit is needed to buy a second house or vacation property. A lower debt-to-income ratio and greater affordability are some criteria that lenders would consider. Substantial reserves, or monies left over after closure, are also very beneficial.

Required part-time occupancy

Lenders anticipate that you, your family, and your friends will utilize a second home or vacation rental for at least a portion of the year. However, you are permitted to generate money from the residence when it is vacant. 

Requirements and Mortgage Rates for Investment Property 

15% to 25% down payment

15% to 25% of the investment property’s purchase price is required as a downpayment for one- to four-unit buildings. However, depending on the loan you are eligible for and your application process, you may need to put down even more money. 

You can also get an asset-based loan from “hard money” lenders. In this case, you will pay 30% or 40% of the appraised value, while the remaining funds will come from the lender.

Loan rates range from 0.50% to 0.75% above average. 

Mortgage rates are significantly higher for residences used as investments. An investment property loan’s interest rate may be 0.5% or 0.75% higher than it would be on loan for a primary dwelling.

A minimum credit score of 640

To qualify for a rental property loan, consumers usually require a credit score of 640 or higher. Rates for people with poor credit, however, might be extremely expensive. Before you consider real estate investment, ideally, your score is 680 to 700 or above.

Occupancy is not required. 

You only have to occupy the property for some time if you purchase it to rent it out full-time.

Second Home vs. Investment Property: Tax Implications 

Second Home Implications 

If your total debt is at most $750,000 and you do not rent out your second home for more than 14 days per year, the interest on your mortgage is tax deductible.

Investment Property Implications 

An investment property’s mortgage interest is fully deductible from taxes. Numerous costs associated with the property, such as upkeep, insurance, and property taxes, are also deductible.

The rental revenue is taxable if you lease out the house for more than 14 days a year.

The $750K overall debt threshold for tax deductions makes it difficult for property owners to reduce mortgage interest if they own a second house.

In essence, you’ve reached your limit for interest deductions if you owe more than $750,000 on your mortgages for two (or more) residences. But the laws are different for an investment property.

A taxpayer’s interest deduction on a mortgage secured by an investment property may be applied to negate any income the property generates.

How To Obtain a Second Home or Investment Property Mortgage

Getting a mortgage for an investment property or a second home is similar to obtaining one for a primary residence. It would be best to meet a lender like a bank, credit union, or independent lender to discuss loan terms. 

Remember that getting a second home mortgage is more accessible than an investment property mortgage. However, while you can use a second home to earn income, an investment property will provide you with tax advantages that a second home cannot.

So, how can you finance your second home or rental property? 

Traditional Loans

For traditional loans, the loan amount must not exceed the conforming lending restrictions that Freddie Mac and Fannie Mae established. In low-price regions, the single-family home loan maximum is $647,200. In high-profile areas, it is $970,800. 

The maximum allowed for four-unit homes in low-cost and high-cost areas is $1,244,850 and $1,867,275, respectively.

Government Mortgages

Federally-backed loans, such as VA and FHA, are an excellent option for real estate investors. Even though you cannot use these loans to purchase a second home, you can use them for multifamily rental properties, as long as one of the units serves as your principal residence.

Home Equity Line of Credit (HELOC) / Second Mortgage 

A home equity line of credit (HELOC) or home equity loan is another popular refinancing option for acquiring a second home or investment property.

Your home serves as security for a HELOC, which lets you take out loans against the equity you have in it. Similar to your credit card, the existing credit is restored when you pay down your remaining debt.

DSCR Loans

The Debt Service Coverage Ratio (DSCR) loan program is one of the unique loan options that real estate investors can access. These non-QM loans are easily accessible because they don’t depend on the borrower’s income. 

The DSCR is determined by comparing a property’s annual net operating revenue to its mortgage debt (including principal and interest). The loan amount that the income from the property can sustain, and the level of income coverage that will be present at a specific loan amount, get determined by the lender using the DSCR analysis.