Second Home vs. Investment Property: What’s the Difference?

You own a home, and now you want to buy another one, which means applying for a mortgage. Your lender wants to know how you plan to use the home, and you wonder: Does it make a difference if you’re getting a mortgage for a second home vs. investment property?

Lenders view second homes and investment properties differently, which affects everything from down payment requirements to the interest rates you pay. Let’s look at what it means to buy an investment property vs. a second home, and how that impacts your mortgage choices.

Table of Contents

1. Second home vs. investment property
   1. What is a second home?
   2. What is an investment property?
2. Second home vs. investment property: key differences
   1. Mortgage rates
   2. Down payment
   3. Tax benefits
3. How to get a mortgage for a second home
   1. Can you refinance a second home vs. investment property?
4. How to get a mortgage for an investment property
5. Should you rent out your second home?

Second home vs. investment property

The biggest difference between a second home and investment property is their primary purpose. One is used to generate income; the other is not.

What is a second home?

A second home is a home you buy for your personal use. You stay in the home for part of the year, and live in your primary residence the rest of the time. Vacation homes and properties you live in during temporary work assignments fall under the second home umbrella.

Owning a second home offers advantages and disadvantages.

Pros

• Mortgage interest is generally tax-deductible

• Interest rates may be lower compared to an investment property

• Down payments may be smaller

Cons

• Renting out a second home could lead to tax complications if you’re not following IRS residency rules

• Limits apply to what you can deduct when renting out a second home

What is an investment property?

An investment property is purchased to generate income for the buyer, either through appreciation or rent. Examples of investment properties include:

• Single-family homes
• Condos and townhouses
• Duplexes, triplexes, and quadplexes
• Apartment buildings
• Short-term rentals
• Fix-and-flip properties

A key distinction between an investment property vs. a second home is who lives in it. Investment property owners cannot use the home more than:

• 14 days out of the year, OR
• 10% of the total days you rent it to others

Just like second homes, investment properties have benefits and drawbacks.

Pros

• Investment properties can generate steady passive income

• You can select a property type that meets your goals (i.e., short-term rental, long-term rental, flix-and-flip, etc.)

• Deductions can help offset the rental income you generate

Cons

• Dealing with tenants can be a headache

• Keeping reliable tenants in the property can sometimes be a challenge

Second home vs. investment property: key differences

Aside from their purpose, there are other things that set second homes and investment properties apart. Here’s how they compare.

	Second home	Investment property
Purpose	Personal use	Income generation
Occupancy	Owner must live in the property more than 14 days per year	Owner must not occupy the property more than 14 days per year
Down payment	10% – 15%	15% – 25%
Interest rates	Lower	Higher
Loan term	Up to 30 years	15 – 30 years
Minimum credit score	620 – 640 for most lenders	620 – 680 for most lenders
Tax benefits	Mortgage interest deduction; limited deduction for rental expenses	Mortgage interest deduction; deductions for rental expenses

Second home vs. investment property mortgage rates

Mortgage rates for a second home vs. investment property are typically slightly lower. That is to say, getting a loan for a second home may cost you a little less than a mortgage for a rental property or fix-and-flip. However, rates for both are usually above what you’d pay for a traditional mortgage to buy a primary residence. 

How much of a difference does it actually make? Here’s an example of how the numbers compare for a $300,000 loan used to buy a second home vs. an investment property. We’ll assume a 30-year term for each one.

	Second home mortgage	Investment property mortgage
Interest rate	6.30%	6.50%
Monthly payment	$3,375.89	$3,406.44
Interest paid	$105,118.84	$108,772.72
Total loan cost	$405,118.84	$408,772.72

That fractional difference in mortgage rates translates to more than $3,600 additional interest for the investment property loan.

Second home vs. investment property down payment

Your down payment reduces the amount you need to borrow, and it also lowers risk for the lender. A typical down payment for a second home is 10% to 20% of the purchase price; at 20% or more, you can avoid private mortgage insurance. 

With investment properties, lenders usually want to see you have more skin in the game. That means a down payment of 15% to 25% instead. You may need to put as much as 30% down if you’re buying a multi-unit property that requires a larger loan. 

Tax benefits of a second home vs. investment property

Owning a second home or an investment property can yield some tax benefits. You can write off the interest you pay on your mortgage for a second home. If you get a home equity loan or HELOC to make improvements to the home, you could write off that interest as well. 

Investment properties offer a broader range of deductions, including:

• Depreciation in the home’s value
• Utilities
• Maintenance and repairs
• Property management fees
• Advertising fees you pay to list the home for rent
• Property taxes
• Insurance

Mortgage interest for an investment property is deductible as a business expense. You’ll need to carefully document any expenses you plan to deduct, along with reporting all the income your rental generates for the year.  

How to get a mortgage for a second home

Getting a mortgage for a second home is a matter of doing some research and planning. To get a conventional mortgage to buy a second home, you’ll need to:

1. Set your budget. Determine how much you can afford to spend on a second home. 
2. Estimate your down payment. Decide how much you’ll put down on the home. 
3. Compare lenders. Look for lenders that offer conventional loans for second homes. Compare the rates, terms, fees, and qualification requirements. 
4. Choose a lender and apply. Fill out the application and provide the required documents. Be prepared to tell the lender exactly how you plan to use the home.
5. Complete underwriting. While inspections may be optional, an appraisal is usually required to get a mortgage for a second home.
6. Schedule closing. If you’re approved, prepare for closing by getting your down payment funds ready and doing a final walk-through. 

Some of the best mortgage lenders for second homes include SoFi, Rocket Mortgage, and Quicken Loans. They’re all highly rated for convenience, flexibility, and funding speed.

The first question to ask yourself is: is how much can you afford in a second mortgage payment? That is the first hurdle. If you can make that payment each month, then we can talk about what we should do with the property (rent it or keep it as second residence).

Can you refinance a second home vs. investment property?

If you have a mortgage for a second home or investment property and want to change the terms, you could refinance it. You’ll need to apply for a new mortgage to replace the existing one. That means meeting the lender’s requirements and having an eligible property type.

You could refinance with an online lender, or opt for a credit union instead. Navy Federal Credit Union, for example, offers mortgage refinance for military members and their families.

How to get a mortgage for an investment property

The process to get a mortgage for an investment property usually looks like this:

1. Choose a lender and get preapproved. Preapproval allows you to see what you might qualify for.
2. Apply. Submit an application and provide the lender any requested documentation. 
3. Complete underwriting. The lender will check your credit, verify your cash reserves, and schedule an appraisal for the home. An inspection may be optional.
4. Close. If approved, you’ll sign the final paperwork, pay closing costs, and hand over your down payment.

You might consider a home equity loan if you want to leverage the value of your current home to buy a second home or investment property. How much equity you have is one of the most important factors for approval. 

Spring EQ and LendingTree are among the best home equity lenders if you want to lock in a fixed rate. Spring EQ also offers a home equity line of credit (HELOC) if you want more flexibility.

Should you rent out your second home?

You can rent out a second home for income, according to the IRS, but there are restrictions on what you can deduct for expenses like maintenance, utilities, and depreciation. To be considered a second home while collecting rent, you must use it more than:

• 14 days out of the year, OR
• 10% of the total days you rent it to others, whichever is greater

If you can follow those rules, it’s possible that the rental income you generate could cover your mortgage payment. Remember that you also have to report any rent you collect as income if you rent the home for more than 14 days.

When deciding if you should rent out your second home, consider: Do you have you have a system to allow for renters (such as closing up some area for homeowners stuff; furnishing with items that don’t hold sentimental value, etc)? Are you aware of all of the tax filing requirements, and do you have a process to keep close track of the income and expenses? Do you want to be a property manager?

Sometimes it is easier to simply let friends/family come stay, rather than opening up the home to paying renters. In either case, a financial planner can help you crunch the numbers in the possible scenarios and give you the data to make an educated decision.