A second home is a “home away from home,” and can come in handy when you want a quick break or extended vacation. You can bypass the hotel check-in lines, botched reservations, or rental unit costs. In fact, you can even earn money by turning your second home into a rental property.
But how do you know whether a second home mortgage is right for you? This guide will cover everything you need to know about how to finance a second home—and how to find the best rates.
In this review:
- Second home mortgage loans
- Does buying a second home make sense?
- Can you afford a second home?
- Can you buy a second home with no down payment?
- Second home mortgage rates
Second home mortgage loans
As long as you meet their eligibility requirements, most lenders will approve a mortgage for a second home. However, not all mortgage lenders are created equally, so you should compare options before applying.
Here are our three top-rated mortgage lenders, so you can request quotes and compare rates on your second home loan.
Simple, Online Mortgage
- No extra fees or commission, ever
- Instant loan estimates
- Experience you can trust – Over $3 billion in total funded loans
Better has a streamlined mortgage application process that includes no fees or commissions, and it offers loan amounts up to $3 million.
Consumers can receive a loan estimate in seconds anytime on the Better website.
- LendEDU rating: 5.00 / 5.00
- Fixed-rate loan terms: better-mortg-1493-termlengthrange_y
- ARM loan terms: better-mortg-1493-armrange
- Minimum down payment: better-mortg-1493-downpaymentlow
- Minimum credit score: better-mortg-1493-mincreditscore
- Full review: Better Mortgage Review
10% down, 100% home
- No hidden fees or prepayment penalties
- Put as little as 10% down on loans up to $3 million
- Exclusive member discounts
SoFi lets consumers get a mortgage with as little as 10% down. There are no hidden fees, and you can get a prequalified quote in two minutes.
- LendEDU rating: 4.77 / 5.00
- Fixed-rate loan terms: sofi-mortg-978-termlengthrange_y
- ARM loan terms: sofi-mortg-978-armrange
- Minimum down payment: sofi-mortg-978-downpaymentlow
- Minimum credit score: Not disclosed
- Full review: SoFi Mortgage Review
3) New American Funding
Your Mortgage, Your Terms.
- Get pre-approved in as little as 48 hours
- Complete the entire application process online
- Choose from a wide variety of mortgage options
New American Funding offers a variety of loans, including government-backed FHA loans, VA loans, and USDA loans. The company even has a self-employment mortgage option for those with non-traditional sources of income.
- LendEDU rating: 4.74 / 5.00
- Fixed-rate loan terms: newamericanfunding-mortg-1529-termlengthrange_y
- ARM loan terms: newamericanfunding-mortg-1524-armrange
- Minimum down payment: Not disclosed
- Minimum credit score: Not disclosed
- Full review: New American Funding Review
Does buying a second home make sense?
Most people don’t really need a second home. However, in some scenarios, it can be advantageous.
Save money when you travel
According to Lori Beardslee, a senior branch manager at Silverton Mortgage in Canton, Georgia, the first step to decide whether a second home makes sense is to determine what you will use the home for.
“The first option is a vacation home that you use as a place to spend weekends and vacations,” Beardslee says.
Sometimes, when you add up how much you spend on hotel rooms or rentals, you realize a second home can be a wise investment. This is especially true if you have a large family, or if you often travel to one location for work or vacation.
Purchase a rental property
The second option is to purchase a second home so you can rent it out.
“If the second home purchase is a rental property, the buyer needs to do their due diligence and crunch numbers to make sure that the income from rent is covering the mortgage plus insurance and taxes,” says Shawn M. Brown at Parkway Real Estate in West Roxbury, Massachusetts.
If you’re handy, Brown says you could purchase a fixer upper, which would be a great way to acquire sweat equity—if you find the right property and it’s located in an area that tenants would find desirable.
“Finding great tenants is sometimes difficult, but a knowledgeable real estate agent or property management company can help you get started on being a landlord,” he explains.
Can you afford a second home?
Although purchasing a second home can be a good financial decision, you also need to exercise wisdom regarding your financial situation.
“Prior to buying a second home, you should first make sure that you are maximizing your retirement accounts, like a 401(k),” advises David Reyes, financial advisor and chief financial architect at Reyes Financial Architecture in San Diego, California.
That retirement savings could amount to more than $30,000 per year tax-deferred, depending on your age and accounts.
Even if you plan to rent out the home, you’ll need to pay this second mortgage every month, whether you have a renter or not. If you had to pay two mortgages for several months, would it be a financial strain?
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Additional second-home expenses
Also, consider expenses other than the mortgage.
“You should also consider the price of utilities on the property each month as well as furnishing the property, which can add up quickly depending on the size of the home and its location,” Brown says.
And then there is routine maintenance and emergencies: roofs leak, pipes burst, HVAC units go out, and termites wreak havoc.
“Make sure that you are financially stable and have plenty of reserve funds in the bank for emergencies, not only for the primary residence but now for the second home as well,” Brown recommends.
How much money do you need?
“When applying for a second home loan, you will have to qualify for both your current primary residence mortgage debt along with the new mortgage debt for the second home,” explains Beardslee.
While there are exceptions, a good rule of thumb is that your monthly debt payments, including your first home mortgage and new mortgage payment, should not exceed 43% of your monthly gross income—a.k.a. your debt-to-income ratio.
Down payment and closing costs
You’ll also need a down payment for the second home.
Brown says most banks will require 10% to 25% down. And anything less than 20% means you’ll be required to pay private mortgage insurance (PMI) along with your monthly payment.
However, there is a way to avoid PMI. “An alternative is to have the loan structured to include your first and second mortgage,” Beardslee explains.
Qualifying for a second home mortgage
Financing will also be different depending on the property’s purpose.
You might be able to purchase a vacation property for as little as 10% down, according to Beardslee, but an investment property would require at least a 20% down payment. Seller contribution limits are also half for a rental property.
“Also, a vacation home allows buyers to use gift funds for the down payment, whereas on a rental home, the buyer must have 100% of their own funds for the purchase,” she explains.
Don’t forget about the tax implications
The tax rules are different for your second home, depending on how you’ll use it.
If you rent out the home, you can deduct some expenses, including mortgage interest, real estate taxes, maintenance, utilities and other expenses.
If you plan to live at the property part of the year and otherwise rent it out, note how the IRS defines a dwelling versus a rental unit. This is important because there are limitations on the rental expenses you can deduct if it’s a dwelling unit.
You can deduct property taxes on your second home—up to maximum state and local limits. But, even with these deductions, purchasing a second home in an area with high property taxes could pose a significant added expense.
How much do you need in cash reserves?
The amount of cash reserves you’ll need to qualify for a second-home mortgage may vary. Beardslee says it’s typically six months in reserves, but it may vary depending on your credit score.
“However, 401(k) and IRA accounts can count towards these reserve requirements,” she explains.
Can you buy a second home with no down payment?
All of our experts say it’s very unlikely that you can buy a second home with no money down.
Beardslee says you’re going to need at least a 10% down payment. “Other options to reach the 10% requirement include receiving a gift from a family member or taking out a loan against your 401(k),” she says.
If you are able to get a cash-out refinance or home equity loan on your primary home, Brown says it’s a great way to start your second venture. “This can potentially give you the funds you need for the down payment as well as reserve funds,” he explains.
However, Reyes cautions against using home equity as a down payment. “This would mean that you likely do not have enough liquid assets and reserves, which would be stretching your finances,” he says.
Your home would be at risk if you default on the mortgage for the second home. It’s one thing to lose your second home—and that would be awful—but it’s another thing altogether to lose your primary residence.
>> Read more: Best No & Low Down Payment Mortgages
Second home mortgage rates
Mortgage rates for your second home are generally the same as they would be for your primary residence, according to Beardslee. That means they’re based on your credit score and market rates.
>> Read more: 30-Year Mortgage Rates
You might see a slight difference if you plan to sell or rent the property.
“Terms are different when it comes to an investment property in that the interest rate is normally one half of a percentage higher on average,” Beardslee explains. “This is because investment properties are deemed a higher risk loan, thus a higher interest rate is standard.”
In the last decade’s recession, she says rental properties were the first to be let go, and had higher default rates than second homes.
How We Chose the Best Second Home Loans
We ranked and rated the best mortgage lenders based on the weighted average of 12 data points. These include:
- BBB Rating (10%)
- Trustpilot Rating (5%)
- States Available (5%)
- Lender Fees (10%)
- Application Fees (10%)
- Number of Branches (5%)
- Number of Licenses and Registrations (5%)
- Number of Regulatory Actions (5%)
- Number of Mortgage Loan Originators (5%)
- Customer Support (20%)
- Zillow Rating (10%)
- Other Rewards and Extra benefits (10%)