Second Home Mortgage Rates: 2024 Outlook

If you’ve built up a significant amount of equity in your primary residence in the last few years, you might be tempted to purchase a second home. However, you will likely need to closely monitor current mortgage rates if you intend to invest in more real estate and you’re no longer a first-time homebuyer.

Here’s what you need to know about the 2024 outlook on mortgage rates for second homes:

Can You Finance a Second Home?

If you’re interested in purchasing a second home, you don’t necessarily have to pay for this property in cash upfront— there are ways that you can finance this purchase.

How To Qualify for Second Home Financing

Keep in mind that a second home is different from an investment property (one used for rent), especially when it comes to occupancy requirements. The IRS says that the owner must live in the second home for at least 14 days a year.

That being said, it’s often more challenging for your mortgage application to qualify for financing on a second home compared to a primary home. For example, lenders typically require higher credit scores, higher down payments, and substantial cash reserves.

As opposed to your first mortgage, buying a second home is considered to have a higher risk, which can impact eligibility. Compare these requirements with those for financing a primary home: a credit score above 620, a down payment of at least 3%, and potentially no cash reserves.

Although the exact qualifier requirements vary by lender and loan type, at a minimum, you will need a credit score of 640. Keep in mind that your credit score is closely tied to the down payment you will need to make. Higher credit scores often translate to lower minimum down payments, though the current minimum down payment is around 10%.

Additionally, your credit score and down payment are both factored into determining your cash reserves requirement. Currently, you can expect to be required to have between two to six months of cash reserves to qualify for a second home loan, though having more cash on hand is always viewed favorably by lenders. 

How To Finance a Second Home

There are several different ways that you can finance a second home, including a home equity loan, a conventional loan, and a bridge loan.

Let’s discuss these different financing options in more depth so that you can make an informed financial decision on your second mortgage:

Conventional Loan

A conventional loan is one way to finance a second home and is perhaps the most popular loan option. The odds are that you currently have a conventional loan for your primary home mortgage, and you can actually use this same type of loan for a secondary home as well.

One of the biggest advantages of using a conventional loan is that you’re typically able to receive a better mortgage interest rate. In exchange for these lower rates, conventional loans come with stricter qualification requirements that can be difficult for some homebuyers to meet.

Non-Qualified Mortgage Loan

A non-qualified mortgage (Non-QM) is another way that you can finance a second home. This option serves as an excellent alternative financing solution for potential homeowners who might not meet the standard prerequisites for conventional or FHA loans. 

Unlike conventional loans, non-QM loans aren't bound by the rules of Fannie Mae and Freddie Mac. Such flexibility allows lenders and loan officers to establish their own criteria, offering a more accommodating underwriting process for borrowers and providing a viable option for a broader range of borrowers.

For these reasons, Non-QM loans are particularly beneficial for self-employed individuals, foreign nationals, high-net-worth borrowers, or those seeking a loan amount that exceeds the conforming loan limits. For example, they’re an especially valuable choice for anyone seeking to borrow an amount higher than the upper limits of a jumbo loan ($726,200). Perhaps best of all is that these loans are highly versatile and can be used to finance a primary residence, vacation home, or investment property. 

Generally, borrowers must have a credit score of at least 620, although some lenders may consider scores as low as 580 under certain circumstances. The combination of less stringent requirements and wider accessibility makes a Non-QM loan an excellent option when considering the purchase of a second home.

What Are Mortgage Rates for Second Homes?

We’ve touched on mortgage rates a bit already, but now it’s time to really dive into the subject that’s been all over the news lately.

Are Mortgage Rates Always Higher for Second Homes?

Mortgage rates for second homes may be higher than the current market rates for primary homes — although it’s often not by much. That doesn’t necessarily mean that rates for second homes are unrealistically high. In fact, the rates for second homes right now may actually be less than your current rate on your primary home.

This is because mortgage rates are currently close to record lows, meaning that if you’re interested in purchasing a second home at a favorable rate, now is the time to do so.

Current Second Home Mortgage Rates

Generally speaking, you can expect to pay around 0.5% more in interest for a conventional loan on a second home compared to a primary home. For example, if interest rates average around 6.5% for a 30-year fixed-rate primary conventional loan, you’ll likely have to pay around 7% for the same loan on a secondary home.

How Do Market Dynamics Impact Mortgage Rates?

Mortgage rates are not determined in isolation; they are significantly influenced by various market dynamics. Factors such as supply and demand, inflation, and the broader economic environment can all have an impact on the mortgage rates that lenders offer.

Economic Indicators Influencing Mortgage Rates

Several economic indicators can influence mortgage rates. These include the unemployment rate, gross domestic product (GDP), Consumer Price Index (CPI), and the state of the housing market.

A low unemployment rate often signals a robust economy, which can lead to higher mortgage rates as lenders anticipate higher inflation. Conversely, a high unemployment rate can signal an economic downturn, potentially leading to lower mortgage rates.

Global Economic Factors

Global economic factors that impact mortgage rates may include international trade policies, economic conditions in other countries, and global geopolitical events.

Geopolitical events such as conflicts or political instability can create economic uncertainty, leading investors to seek safe-haven investments like U.S. treasury bonds. This can drive down bond yields and, subsequently, mortgage rates.

Government Policies

Government policies that significantly influence mortgage rates can include monetary policies set by central banks, fiscal policies involving government spending and taxation, and regulatory policies that directly affect the lending industry.

Central banks, like the Federal Reserve, influence mortgage rates through their control over short-term interest rates. When the central bank raises these rates, mortgage lenders often increase mortgage rates in response, and vice versa.

Fiscal policy can affect the overall economic environment, influencing factors like inflation and unemployment that impact mortgage rates indirectly.

What Is the 2024 Outlook for Second Home Mortgage Rates?

The Federal Reserve (or the Fed) opted not to raise interest rates during their last several scheduled meetings, with the last increase coming on July 27, 2023. These decisions come after a series of 11 rate increases since the start of 2022. 

Several consecutive months without another hike is a positive indicator of decreasing interest rates in 2024. However, it’s important to closely monitor the following factors that play a part in determining interest rates, as there could still be additional increases on the horizon..

The Federal Reserve

Taking into account the Federal Reserve's current stance, the 2024 outlook for mortgage rates might still be subjected to further increases. With the Fed funds rate still hovering near its highest since early 2001, it's evident that the monetary policy is tightening, which generally leads to higher mortgage rates.

Fed Chair Jerome Powell has indicated that there could still be another rate hike in 2024. However, it's also important to note that Powell mentioned it's unclear when the Fed will start reducing rates. This suggests some uncertainty in the rate outlook, indicating that while rates could still climb, a shift in policy leading to rate cuts can't be ruled out entirely.

Those considering a second home purchase or cash-out refinance should closely monitor these developments. The potential for further rate hikes could make it more expensive to borrow. On the other hand, if the Fed starts to cut rates, borrowing costs could decrease.

Consult with a financial advisor or an option like Vaster for personalized advice based on individual circumstances.

The Federal Housing Finance Agency

The Federal Housing Finance Agency (FHFA) has reported that U.S. house prices rose by 0.8% in July, marking an increase of 4.6% from July 2022 to July 2023. This follows an upward revision of the previously reported 0.3% price increase in June to a 0.4% increase.

Across the nine census divisions, seasonally adjusted monthly price changes from June 2023 to July 2023 varied from +0.1% in the East South Central division to +1.4% in the Middle Atlantic and South Atlantic divisions. The 12-month changes ranged from +0.3% in the Mountain division to +8.1% in the New England division.

The 2024 outlook for second home mortgage rates could be affected by these ongoing appreciations. The continuing rise in house prices might lead to higher loan-to-value ratios (the ratio of the loan amount to the value of the property) for second homes, potentially affecting the mortgage rates lenders offer.

As always, the exact impact will depend on a variety of factors, including individual borrower circumstances and regional variations in house price growth.

How To Get the Best Mortgage Rate for a Second Home

With all this information in mind, how can you get the best mortgage rate for a second home?

Here’s a step-by-step guide on what you need to do:

Step 1: Improve Your Credit Score

One way that you can get a better mortgage rate is to improve your credit score. Just because you’re technically able to get a loan for a second home with a credit score of 620 doesn’t necessarily mean that you should. This is because lenders are going to charge you higher interest rates to offset the risk that they’re taking by lending to you with your low credit score.

To qualify for the best interest rates and spend less over the life of the loan, you need a credit score that’s at or above 720. But how can you improve your credit score?

Here are some tips to help:

• Avoid taking on new debt or opening up new credit cards
• Pay down large balances 
• Make at least the minimum payment by the due date
• Pay more than the minimum payment to reduce your debt-to-income ratio (DTI)

Step 2: Save For a Larger Down Payment

Another way that you can get a better mortgage rate is to save up more money for your down payment and cash reserves. Again, just because you’re technically able to secure a loan for a second home with just a 10% down payment doesn’t necessarily mean that you’re getting the best interest rate.

Instead, you should try to save up more money to come up with a down payment that’s at least 20% of the home’s price. Additionally, you should try to save up even more money to show that you have plenty of cash reserves left over after the purchase, as doing so decreases the risk for the lender and may result in a lower interest rate.

Step 3: Shop Around With Different Lenders

Shopping around with different lenders to locate the best rate is always recommended, no matter what type of loan you’re using. Experts recommend that you receive quotes from at least three different lenders to make sure that you’re getting the best rate possible. Even a seemingly small difference of 0.25% can save you a ton of money throughout the term of your loan.

For example, let’s say that you receive one quote of 7.5% on a $360,000 30-year fixed-rate loan (as opposed to an adjustable-rate mortgage). This means that your monthly payment would be $2,523. You would pay over $548,000 in interest over the term of the loan.

Alternatively, let’s say that you got another quote of 7.75% on the same loan; your monthly payments would be $2,585. You would pay over $570,000 in interest over the term of the loan — $22,000 more than you’d pay with the other quote.

Step 4: Strategically Secure Your Rate 

Given the current mortgage market conditions, it's crucial to strategically secure your rate. With the Federal Reserve indicating potential additional rate hikes in 2024 and the ongoing appreciation in house prices as reported by the FHFA, mortgage rates could continue to rise.

However, it's also important to keep in mind the degree of uncertainty in the market. It's not just about securing your rate as soon as possible but also about observing the market trends and making an informed decision.

Consult with a financial advisor or a lender like Vaster to understand when would be the most opportune time to lock in your rate based on your individual circumstances and market predictions.

What Are the Advantages and Disadvantages of Owning a Second Home?

Potential for Rental Income

One of the significant advantages of owning a second home is the potential for rental income. In areas with high tourist demand or during peak vacation seasons, a second property can serve as a lucrative source of passive income. According to data from the U.S. Census Bureau, the number of people renting vacation homes in the U.S. has been on a steady rise over the past decade, suggesting a robust rental market.

However, becoming a landlord comes with its own set of responsibilities. You'll need to manage bookings, ensure the rental property is clean and well-maintained, and handle any issues that arise. Depending on the local laws, you may also need to obtain permits or licenses to rent out your property.

Vacation Benefits

A second home can also offer personal benefits, especially if it's located in a vacation hotspot. It’s a convenient and cost-effective solution for family vacations or weekend getaways. Instead of worrying about booking accommodations, you have a ready-made holiday home waiting for you.

On the flip side, having a second home in a vacation spot can limit your holiday destinations, as you might feel obliged to use the property to justify the investment. It's also important to remember that popular vacation spots can be crowded during peak seasons, which might not be everyone's idea of a relaxing getaway.

Property Tax Benefits

Owning a second home can also provide tax benefits. If you rent out the property, you may be able to deduct rental expenses, including interest on your mortgage, insurance premiums, and maintenance costs. However, tax laws vary from state to state, so consult with a tax advisor to understand the potential tax benefits fully.

The downside is that property taxes on second homes can be high, especially in desirable locations. Moreover, unlike a primary residence, a second home does not qualify for the homestead exemption, which can lead to higher property tax bills.

The Financial Burden and Maintenance Costs

Perhaps the most significant disadvantage of owning a second home is the financial burden. Aside from the monthly mortgage payments, there are ongoing costs like property taxes, mortgage insurance, maintenance, and possibly homeowner association fees. These costs can add up, making the second home a significant financial commitment.

Maintenance can also be a challenge, especially if the second home is in a different city or state. You'll need to arrange for regular upkeep and be prepared to handle any repairs or emergencies remotely.

Homeownership

Reach out to Vaster today to start the process of financing your second home before mortgage rates rise even further. Vaster is a mortgage private lender that offers a variety of customized financing solutions for second homes and investment properties. If you’re ready to go, click here to get started on your application.

Sources:

Federal Reserve Focuses Monetary Policy on Fighting Inflation | U.S. Bank

FHFA House Price Index | Federal Housing Finance Agency

CPI Home | U.S. Bureau of Labor Statistics

U.S. International Trade in Goods and Services, August 2023 | U.S. Bureau of Economic Analysis (BEA)