Conventional Giants Fannie Mae and Freddie Mac have vacation home loan rates looking more like rental property mortgage rates. However, here are 3 things you can do to lower your vacation home loan rate.
Like it or not (I’m in the not group), Conventional vacation (aka “second”) home loan rates are up. This – all thanks to a Fannie Mae and Freddie Mac change in early 2022. Prior to the 2022 vacation/second home rate pumping change, second home and primary home Conventional mortgage rates typically matched for like kind borrowers (same score and same down payment – assuming at least 10% down on either).
Now, vacation home buyers and refinancers see higher rates compared to primary residence rates (much like they historically have for rental property loans). The increase in mortgage rate magnifies when lower down payment and/or lower credit scores are present. In fact, the difference in rate may be very significant depending on both factors. However, there are 3 things you can do to keep a vacation home loan rate down.
1. Strengthen Your Credit Score
The new Conventional home loan rate adjusters for a vacation home loan largely rely on on credit score. The lower the credit score the higher the vacation home loan rate. As a result, it pays to get your credit in tip top shape prior to closing on your vacation home loan.
2. Increase Down Payment (2 Ways)
In addition to credit score, vacation home rates jump depends on down payment. With second home’s already requiring 10% down as a minimum, borrowers see a difference in interest rate with 10%, 15% and 20% down payments on their vacation homes. The more down the lower the mortgage rate. There are 2 ways to increase down payment without using liquid cash:
a. Pull equity from a primary home. You can do this with a cash out refinance or a HELOC. Equity funds may be used as part or all of the down payment on a vacation home.
b. Borrow from yourself. While not always a good fit, sometimes borrowing from yourself (your retirement, brokerage account etc…) for some or for all of a vacation home down payment to get a lower rate makes sense.
3. Consider Paying Points
The increased costs behind vacation home rates can be absorbed by paying upfront fees (aks “points”). When choosing this option, borrowers keep their interest rate lower based on the fact they are paying for some or all of the new rate adjusters from Fannie and Freddie up front as points/fees (instead of paying a higher rate to absorb them). Those looking to hold the property for the long term will benefit from this plan. Those not planning to hold the vacation home long term should steer clear of this strategy.
With Fannie Mae and Freddie Mac increasing vacation home mortgage rates, the time for a sharper cost effective rate strategy is now.