Investment property and second home mortgage rates in 2024

Are second home mortgage rates higher?

It’s a common assumption that if you have a mortgage for your primary residence (the home you live in), you might expect to get the same interest rates or loan offers on your second home. But that’s not often the case.

Whether you’re buying a second home, vacation home, or investment property, it’s important to anticipate slightly higher mortgage interest rates and potentially more stringent eligibility criteria. Here’s what you can expect — and what you can do to get a lower second home mortgage rate.

In this article (Skip to...)

• Mortgage rates
• Second homes
• Investment properties
• Primary homes
• Why rules are different
• Avoiding higher rates
• Second home vs investment
• FAQ

Second home mortgage rates vs. investment property mortgage rates

Mortgage interest rates are higher for second homes and investment properties than for the home you live in.

Generally, investment property rates are about 0.5% to 0.75% higher than market rates. For a second home or vacation home, they’re only slightly higher than the rate you’d qualify for on a primary residence.

• Second home loan mortgage rates: Up to 0.50% higher than primary home rates
• Investment property mortgage rates: Around 0.50% to 0.75% higher than primary home rates

Of course, investment property and second home loan mortgage rates still depend on the same factors as primary home mortgage rates. Yours will vary based on the market, your income, credit score, location, and other factors.

If your financial situation has changed since you bought your first home, your new mortgage rate might vary by a wider margin than average. This can be true for both home purchase and refinance rates for second homes and rental properties.

Second home mortgage rates and rules

Here’s what you need to know about second home mortgage rates and requirements if you want to buy a vacation home — one you’ll live in for part of the year, but not full-time.

Occupancy: Part-time occupancy required

Lenders expect a vacation or second home to be used by you, your family, and friends for at least part of the year. However, you’re often allowed to earn rental income on the house when you’re not using it. Rental income rules vary by mortgage lender.

Second home interest rates: Slightly above market

A second home is not a primary residence, so lenders see more risk and charge higher interest rates. However, it’s essential to note that these rates are considerably more favorable than those associated with investment properties. The interest rate on your second home should be less than half a percent higher than what you’d qualify for on a primary home loan.

Down payment: Usually 10% or more

You’ll likely be required to put down at least 10% for a vacation home. And if your application isn’t as strong (say you have a lower credit score or smaller cash reserves), you might be required to make a down payment of 20% or more.

Credit score: 640 or higher

Purchasing a second home or vacation home requires a higher credit score: typically 640 and up, depending on the mortgage lender. Lenders will also look for less debt and more affordability — meaning tighter debt-to-income ratios, or DTIs. Substantial cash reserves (extra funds in the bank after closing) are a big help, too.

Investment property mortgage rates and rules

Here’s what you should know about mortgage rules if you’re purchasing an investment property: one you will not live in at all and plan to rent out year-round.

Occupancy: Not required

If you’re financing a home as an investment property, and plan to rent it out full-time, you are not personally required to live in the building for any amount of time.

Investment property loan rates: 0.50% to 0.75% above market

Mortgage rates are quite a bit higher for investment properties. Often, your mortgage interest rate will be 0.5% to 0.75% higher for an investment property than it would be for a primary residence. This is because mortgage lenders consider rental homes to be riskier from a lending perspective.

Down payment: 15% to 25%

Down payment requirements are often around 25% or more for an investment property. You may be able to put as little as 15% down, but expect to pay higher interest rates. This rule of thumb applies to one-unit as well as two-, three- and four-unit properties. You may also be required to make a bigger down payment depending on the strength of your application and the type of mortgage loan you qualify for.

Private lenders — sometimes called “hard money” lenders — might also make asset-based loans. The borrower puts down 30% or 40% of the purchase price and the lender provides the balance.

Flippers often use such short-term mortgage loans to finance their deals. However, this can be risky. If the property does not sell for enough to cover the loan amount — or does not sell at all — the borrower can face foreclosure and the loss of all equity.

Credit score: 640 or higher

Lenders generally require borrowers to have a credit score above 640 for an investment property loan. However, rates can run very high for low credit scores. Hopefully, your score is 680 to 700 or more before you think about investing in real estate.

For comparison: Primary residence mortgages

When discussing second home and investment property mortgages, rates and rules are measured against those for primary residences. To give you a clear idea of what those benchmarks are, here are the typical lending rules for primary home mortgages:

Occupancy: Required

Borrowers can purchase properties with one to four units using residential financing, provided they live in one of those units. Generally, the home must be occupied within 60 days of closing. If married, both spouses must occupy the property. The property can be a single-family home or part of a multi-unit property such as a condo complex.

Interest rates: Standard market rates

Because residential financing involves little risk, mortgage rates are low relative to vacation homes and investment properties. The market rates you see advertised by banks and lenders apply to primary residences. Of course, your own rate depends on factors like your credit score and down payment and may be higher or lower than what you see advertised.

Down payment: Starting at 0%-3%

Primary home loans come with a wide range of down payment options. Residential borrowers can finance with zero down for VA-qualified borrowers, 3.5% down with FHA mortgages, 5% down with conventional financing, and 3% down with the Freddie Mac Home Possible program or the Fannie Mae HomeReady mortgage.

Credit scores: Starting at 500-620

You can finance a primary residence with lower credit scores than you could for an investment or vacation property. FHA loans allow credit scores as low as 500 (with 10% down) or 580 (with 3.5% down). Most lenders allow credit scores starting at 620 for a conventional loan.

Why second home mortgage rates are higher

The home you live in is considered your primary residence, and it’s seen as the least risky form of real estate. Even in challenging times, it remains the one expense that homeowners are most likely to prioritize and continue paying. A vacation home or investment property, on the other hand, is riskier. Borrowers more inclined to consider delaying or missing their monthly mortgage payments on such properties.

Because of the higher risk second homes pose, they come with stricter rules about financing. As shown above, those rules include above-market interest rates, bigger down payments, higher credit scores, and more.

Of course, borrowers will find different lending standards for different types of property, depending on the lender and the mortgage program.

For example, even when financing a second home with a conventional home loan, you’ll pay mortgage insurance premiums if you bring less than a 20% down payment. Additionally, FHA and VA loans do not allow for the purchase of rental properties at all. So it’s important to compare home loan options prior to embarking on the financing journey for your second home.

Can you avoid higher rates on a second home mortgage?

When you apply for a mortgage loan, you must declare how you intend to use the property. Mortgage lenders take such declarations seriously. That’s because they don’t want to finance riskier investment properties with residential financing.

It might be tempting to list your second home as a primary residence, and profit from lower interest rates or easier qualification. But it’s unwise to do so. Lying on a mortgage application can land you fines in the thousands. In very serious cases, mortgage fraud can even lead to jail time.

So always be truthful with your lender, and ask your mortgage loan officer plenty of questions if you’re not clear on the loan rules. For instance:

• Are you allowed to have overnight rentals?
• Are there limits regarding how many nights you can rent?
• How much time must you spend there for it to qualify as a vacation home instead of an investment property?
• Can you have an accessory dwelling unit?

Get answers in writing to ensure you fully understand the requirements for your second mortgage. If you’re having trouble qualifying with one lender or not finding the home loan program you need, try another lender. They all have different home loan options and mortgage rates.

Do I need a second home or investment property mortgage?

The real estate market is changing — and with it, mortgage rules. People are using their homes in new and different ways that can affect the type of home loans they need.

If you want to rent out part or all of your home, or another building on your property, that can affect financing. See a few examples below.

If you’re not sure how your living situation will affect your mortgage loan, connect with a lender to learn more about which rules apply.

Homes as hotels (Airbnb and VRBO)

The growth of Airbnb and similar services means that homes can be used to generate income in new ways. A spare bedroom, basement apartment, or converted garage can now function as a rental property. In major tourist destinations, primary residences are being converted to overnight rentals, raising home prices.

Generally, you can rent out part of your house and still finance it as a primary residence. But if you plan to use the home for vacationing yourself, and also rent it out, you’ll need a second home mortgage.

“In most cases, if you use a Schedule E (Form 1040) to report rental income for the property, then your lender will require financing with an investment property loan,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

Accessory dwelling units or tiny homes

The affordable housing shortage in many areas is causing entire states to change zoning laws. Many homeowners are now able to build or purchase smaller homes on the same land lots as standalone single-family homes.

For example, New Hampshire now allows “accessory dwelling units" (ADUs) with up to 750 square feet on single-family lots. Oregon has eliminated single-family zoning in many communities. California is allowing multiple units for lots once restricted to single-family homes.

This could be a back-road for homeowners who want to purchase an investment property without an investment property mortgage. You might purchase a home with an ADU already attached and live in the main unit. Or you might take a second mortgage on your current home to build an ADU on your property — as long as you keep living in the original building.

Either way, you can rent out the side property for some extra cash, even though it was technically purchased with a primary home mortgage.

Second homes as first homes

These days, there’s a trend among homebuyers where some are opting for a vacation home as their first home. This approach can be a good workaround for young professionals who aspire to invest in real estate, but can’t afford it in their home cities. However, it’s essential to keep in mind that even though you’d be buying a vacation home with your first mortgage, it still continues to be categorized as a second home mortgage. That’s because you wouldn’t be using the property as your primary residence.

Investment property and second home mortgage rates FAQ

Check investment property and second home mortgage rates today

Obtaining a competitive mortgage rate is a key factor in securing your dream home, whether it’s for your primary residence, second home, or an investment property. Nevertheless, the rate you ultimately qualify for is intricately tied to your financial profile. Factors such as your credit score, income, and available cash reserves can significantly impact your interest rate.

To discover the most competitive rates available to you today, it’s crucial to shop around different lenders. By taking the time to compare offers, you can make an informed decision that aligns with your financial goals and home aspirations.