Second home or an investment property?

Question

I see a big difference in the mortgage rate in my state for Second home (3.25%) vs Investment property (4.25%) loan products. While I own a primary residence, I want to purchase another downtown condo (not that far from my primary residency) and most likely rent it out until the pandemic is over (at least) and use it myself for close-to-office needs + rent when not in use. Will this kind of property qualify for a Second home loan product? Or I should get it as an Investment property loan product and then refinance when applicable.

Looking for your experience and advice here. Thanks!

David Kiszka · Answer

@Alex S. 1% may sound like a lot but if that is what you have to get to do the deal TAKE IT! Make sure that the numbers worked with the higher interest rate. If you are in a desirable area with constant rent increase and increases in property value, you will not even notice the extra interest after a year or two.

Austen Mueller · Answer

Buy another condo and move into it. Then rent out your primary residents. This way you don't have to pay the unfavorable rates and get income from your first residents. Or are you able to leverage the equity out of your current residents with a cash out refinance and do something with that. That will depend on the terms of the refinance and prices in your market unless you invest it into another market where your money may go further.

Jeff Shumway · Answer

How far from your primary is it? There is no specific distance requirements from your primary residence but it will have to pass the smell test in underwriting. If you have an arduous commute from your primary to your work, it may make sense to do it as a second home.

Jeff Shumway · Answer

If it's only a few miles then it sounds like it may be better suited as an investment property. So long as it's one unit, you should be able to do a 15% down payment and look into buying the rate down as much as possible to lower your payment.

Alex S. · Answer

A few miles, it will be hard to pass that test, and I don't want to lie, if it's not qualified then it's not, I just want to see what is the best strategy. I think if I intend to use it as an investment property, it should be an investment mortgage. If something changes later, I'll do a refinance as a second home mortgage (if that is possible).

Alex S. · Answer

I had that idea about moving into that new property but that is not something I want to do, at least not just to get the lower rates. Thanks for the suggestion on the cashout refinance. I think if I'm not planning to move in there right away I have to accept investment property rates.

Second home or an investment property?

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