How can I refinance my vacation home?
If you have a vacation home with an older, expensive mortgage, consider taking advantage of today's historically low mortgage rates. Rates are currently around 4 percent, so owners paying more than that should consider refinancing, says Gibran Nicholas, CEO of CMPS Institute, a national organization that certifies mortgage lenders and bankers in Ann Arbor, Mich.
"You can borrow money at a very low rate, and that makes financial sense," Nicholas says.
Refinancing a vacation home isn't much more complicated than getting a loan on a primary residence. But homeowners have to remember that the process for getting approved for any mortgage is much more involved than it was before the housing crisis, says Michael Moskowitz, president of Equity Now, a mortgage lending company in New York.
In order to qualify, you'll likely have to provide tax returns, several bank statements and proof of income to show your ability to repay the loan, Moskowitz says.
At a time when financial constraints have forced some borrowers to sell their second homes, refinancing can help make your vacation home more affordable and thus, more enjoyable. If you're able to lower your mortgage rate by 1 percentage point or more, it could save you thousands of dollars, says Moskowitz.
Equity is essential
You'll need to have equity in your property to refinance it -- plan on at least 20 percent, says Matt Hackett, an underwriting manager at Equity Now. The home must appraise for an amount that's high enough to allow an acceptable loan-to-value ratio, he explains.
That's a different standard than for primary residences, where homeowners may be able to qualify for Federal Housing Administration (FHA) financing with more lenient equity requirements, Hackett says. "The FHA doesn't finance vacation homes, so having lower amounts of equity or as little as 3.5 percent cash down won't work," he says.
Moskowitz says it is possible to find a mortgage lender that will allow as little as 10 percent equity, but you'd probably end up paying for private mortgage insurance -- which can add nearly 1 percent to the payment -- in order to get the loan approved.
Nicholas says that with a vacation home, "interest rates are comparable to rates for a primary home," although you may have to pay one-eighth to one-quarter percent more.
Read: 6 steps to a lower refinance rate
Your FICO score will have a much larger impact on your rate. "FICO is very important. It's one of the biggest factors that determine your interest rate and your ability to get a mortgage," Moskowitz says.
If your FICO score is a 780 or higher, you'll probably get the best rate available. On the other hand, if your score is below 620, you'll have a tougher time finding a mortgage at all, he says. In general, homeowners with the best credit histories and low debt-to-income ratios are offered the best loan terms, says Hackett.
Anthony Sprauve is director of public relations for MyFico.com, the consumer division of FICO, the company that provides credit scoring. He says it is a good idea to avoid surprises by reviewing your FICO score before applying for a loan. He also recommends pulling your credit reports from all three major credit reporting bureaus (Experian, TransUnion and Equifax) at least once a year, whether you choose to refinance or not.
"You want to monitor your credit report to check for any inaccuracies," he says.
Since refinancing a vacation home is cheaper and easier than refinancing an investment property, some owners are tempted to wrongly portray an investment property as their vacation home, says Hackett.
But they shouldn't bother, he says, because the lender will review monthly bill statements and other records to check on the accuracy of the loan application. "From an underwriting standpoint, we spend a lot of our time figuring out if it's truly a second home," he says.
Once you've provided the necessary documentation, it shouldn't take long to close on a refinance for a vacation home, says Moskowitz."The whole process should take about two to three weeks," he says.
It's a good idea to talk to your lender about refinancing your vacation home. If you have a fair amount of equity, a good credit history and sufficient income, you're in a good position to take advantage of today's low interest rates for your vacation property.
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