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.
Credit counts
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.
White lies
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.
Closing quickly
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.