Looking to purchase a second home? Or maybe your goal is to buy an investment property. It’s important to know the difference between an investment property and a second home. Especially because obtaining mortgage financing for each of the two is a very different process where the costs can vary dramatically.
Differences Between Second Homes And Investment Property
A second home, also called a vacation home, is just that, a second residence for the buyer. The intent is that a buyer purchases the home for their enjoyment and lives in it for a percentage of time each year. If the owner does not live in the second home on a semi-regular basis, mortgage lenders will consider it an investment property. Additionally, to be considered a second home, the property must also be located far enough away from the buyer’s primary residence. Typically, a second home must be at least 50 miles away from your existing home; otherwise, it may not be considered a second home.
This is one of the main differences between second homes and investment properties. Typically, a buyer would not reside in their investment property. Instead, the property would be rented out for the majority of the year. An owner may also plan on holding onto the property until it appreciates enough in value to be sold for a profit. Lastly, unlike a second home, an investment property is allowed to be located close to your primary residence (within 50 miles).
Interest rates for investment properties are usually higher compared to interest rates available for a primary residence. There’s a reason for this: from a mortgage lender’s perspective, loans for investment properties are seen as riskier. Because homebuyers aren’t actually living in these investment homes, lenders believe that buyers may be more willing to walk away from these homes (and their mortgage payments) if they suffer a financial setback.
Higher interest rates can also provide extra protection for mortgage lenders. With investment properties, lenders will also require higher down payments from homebuyers, typically at least 25% of a home’s final sales price. Again, this comes down to protection. Lenders believe that buyers are less likely to walk away from their investment properties if an owner has already invested a large amount of their own money into the property.
Overall mortgage interest rates are higher for both second homes and investment properties compared to primary residences. Investment property interest rates are about 0.5% to 0.75% higher than market rates. In contrast, interest rates for second homes or vacation homes are only slightly higher than the rates seen for primary residences.
- Interest Rates for A Second Home: Usually less than 0.50% higher than mortgage rates for a conforming primary purchase.
- Interest Rates for Investment Property: Around 0.50% to 0.75% higher than mortgage rates for a conforming primary purchase.
Of course, interest rates for both investment properties and second home mortgages are still based on the same factors as a primary home mortgage. Interest rates available to individuals will vary based on the market, income, credit score, financial obligations, location, and more.
Still have questions about investment properties and second homes? Our team is available seven days a week with 60-minute responses during business hours. Our goal is to make the mortgage process as fast, easy, and seamless as possible for you. We have an expert team full of highly-trained, diligent, and friendly individuals to guide you every step of the way and answer any questions you may have. Working with JVM to get a mortgage or refinance your home will save you time, money, and stress.
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