A mortgage for a vacation home is similar to that of your primary residence, except for a few critical differences: Second home mortgage rates tend to be higher, and it may be harder to qualify for the lowest APRs advertised.
Second home mortgage rates trend higher because you’re taking on more financial responsibility by owning multiple properties. Lenders also fear there’s a greater chance you’ll default or walk away from a vacation home than from a primary residence. It’s not the only roof over your head, the thinking goes.
Current second home mortgage rates
Second home mortgage rates — or the interest rates you would pay if you borrow to purchase a second home — are generally lower than APRs for investment properties, which carry even more risk for lenders. Meanwhile, rates are higher than primary home mortgage APRs, although just how much higher isn’t set in stone.
“I have seen the change as small as .125% to (the primary home mortgage) rate to as much as .75% to rate,” said Mark Worthington, a loan officer for national lender Churchill Mortgage.
For context, here are current mortgage rates overall:
Economic factors like inflation and policymaking affect how mortgage rates are determined broadly. At the individual borrower level, rates for second home mortgages vary based on many of the same factors that impact primary mortgage rates, including:
- Interest rate type: Fixed rates don’t change for the life of the loan. Meanwhile, the APRs on adjustable-rate mortgages (ARMs) are tied to financial indexes that can change over time, usually every six months or year. ARMs tend to have lower starting rates, but there's a risk the loan could become progressively more expensive.
- Credit scores: Borrowers with better credit pay lower rates, plain and simple. If you’ve made prompt and full payments on your primary home mortgage, your credit scores are likely in good shape, barring any negative events on your credit reports.
- Debt-to-income (DTI) ratio: A DTI above, say, 43% results in higher rates because lenders may fear you’re taking on more debt than you can realistically afford to repay.
If you already have a home loan for your primary residence, that loan balance could be increasing your DTI, unless you have sufficient and stable earnings to compensate.
- Down payment: Second home mortgages usually require larger down payments than mortgages for primary homes. A higher down payment can result in a lower interest rate and overall cost of borrowing.
Usually, your choice of home loan program impacts your interest rate, too. However, your options for a second home mortgage will be limited, as government-backed programs (like FHA loans and VA loans) are strictly for primary residences.
How mortgage rates for second homes are trending
Mortgage rates in general went from record lows during the COVID-19 pandemic to hitting a two-plus decade high. Post-pandemic unease and inflation drove the Federal Reserve to increase the federal funds rate — or the rate at which banks lend and borrow — 11 times between March 2022 and July 2023. (The Fed has since held rates steady, through January 2024.)
With 30-year mortgage rates hovering above 7% since the summer of 2023 and through early 2024, it should be no surprise that second home rates have also stayed aloft. But there could be good news on the horizon.
"Rates on second homes generally trend the same as loans on primary residences," said Worthington. "The consensus of the mortgage industry is that rates will trend downward in the coming year."
What qualifies as a second home?
There are specific, lender-set criteria for properties to be eligible for a second home mortgage, including:
- The house must typically be a single-unit dwelling. Single-family homes, condos and co-ops count, said Shelby McDaniels, a director at JPMorgan Chase.
- It must be suitable to live year-round. This is true even if you only plan to spend part of the year there.
- You must have exclusive use of the property. You can't be planning for long-term leases or rental properties, use the home as a timeshare or put it under the control of a property management company. However, in some cases, you may be allowed to rent the property for up to 180 days per year and still qualify it as a second home.
Some mortgage lenders also impose location restrictions, such as the second home being a certain distance away from your primary residence or being located in an area where second homes are often found.
Did you know? If you spend more than 14 days there per year, you can likely consider it a second home for tax purposes, instead of an investment property, according to IRS guidelines. As always with tax matters, it’s wise to consult a certified tax professional.
The pros and cons of second home mortgages
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Borrowing to buy a second home may be the only way to afford a vacation property. Interest rates on second home mortgages are usually more affordable than on investment properties and may be only slightly higher than the rate on a primary home loan. You'll also have the flexibility to choose your loan type and, if you itemize your tax deductions, you may be able to deduct mortgage interest (and possibly property tax) on a second home loan.
Unfortunately, you’ll typically pay higher rates than for a primary residence mortgage. Also, you’ll likely need a higher down payment and more cash reserves than you perhaps needed to secure your original home loan. That's because mortgages for second homes are riskier propositions for lenders.
Depending on your lender, you may not be able to rent out a second home whenever you want or hire a management company to do it for you, since this property is supposed to be a personal home and not a money-making investment. That said, there could be room for renting it out up to lender-established limits.
Eligibility requirements for a second home mortgage
Because second homes are riskier for lenders, there are usually stricter eligibility requirements, including:
- A 20% down payment: Although McDaniels said some lenders will accept as little as 10% down, the higher your down payment, the less risk you pose to the lender. One possible strategy to come up with a sizable down payment is to tap the equity in your primary residence’s mortgage, either through a cash-out refinance or home equity loan.
- Good or excellent credit: Credit scores of 620 or higher are usually required.
- A DTI below 43%: McDaniels said that applicants with a larger down payment and high credit scores may be accepted with a higher DTI, but lower is always better.
- Two to six months of assets in reserve: This is money you could use to pay your mortgage if you experienced an unexpected loss of income.
5 tips for scoring competitive second home mortgage rates
- Be sure your property meets the definition of a second home.
- Save up a larger down payment to reduce the risk to lenders.
- Shop around with several lenders to compare rates and terms.
- Aim to have at least six months of assets in reserve so you're an especially qualified borrower.
- Improve your credit and pay down debt to strengthen your application.
Frequently asked questions (FAQs)
Second home mortgage rates usually follow the same trends as primary residence mortgage rates and are impacted by economic factors like the federal funds rate and inflation. Your borrower credentials, such as your income, debt and credit scores, also affect your rate.
Yes, it’s harder to qualify since you’re taking on more debt (in addition to your primary home loan, if applicable) and because lenders believe you’re more likely to default on a second home mortgage than a primary residence loan. You’ll usually need a larger down payment and several months of assets in reserve to qualify for a second home mortgage.
Fifteen-year mortgages usually come with lower rates because the shorter repayment term presents less risk for the lender. This is true for mortgages for primary residences and vacation homes alike. Payments are higher on a 15-year mortgage — although total interest costs are lower — because the loan is being repaid in a shorter time frame.
It’s possible to refinance a mortgage on a second home if you have sufficient equity in the home and strong credit scores, income and assets.
