Mortgage Finance Strategy

Primary Homes, Second Homes and Investment Properties

With the increasing prevalence of people owning multiple homes, the are many questions around the costs of financing them.    In all cases, lenders will place your home into 1 of 3 "buckets":  Primary Home, Second Home, or Investment Property.   Primary and Secondary homes come with lower interest rates/financing costs. Investment properties have higher interest rates/financing costs.   Why? Its Risk to the lender!

Investment Homes and Second Homes are two phrases often interchanged when we talk about homeownership. There are some key differences that lenders are concerned with when lending money for a purchase or refinance.

A second home is a home that you intend to live in for part of the year. While it can be rented, renting the property for more than 2 weeks will end up classifying the property as a rental and require the reporting of rental income and taxes. You cannot buy the house right next door to you and consider it a second home. Most lenders will only recognize a second home if it is at least 50 miles away from their primary residence.

Investment Homes are properties that you do not live in.  Because it is an investment home does not mean it needs to be rented. You can remodel and flip the home or let your friends and family stay there. Lenders view an investment home as your intention of getting a return on your investment at some point in the future.

Lenders charge higher interest rates on investment properties because it is riskier for them to loan money to someone with two or more properties. In case of a default, the owner is more likely to walk away from an investment property (i.e. foreclose) than a primary or second home. The general rule of thumb is that interest rates for investment will be about 1-2% higher than on your primary residence. 

Knowing which property "bucket" you will fall into and the differences between them are key in forming the best approach to hitting the target for your home financing decisions. 


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