There are similarities between refinancing your primary mortgage and a mortgage on a second home or investment property, but there are some crucial differences in requirements. Before you embark on refinancing your second home or investment property, here’s what to know.

What is a second home versus investment property?

In simplest terms, a second home is a property you live in for part of the year, typically used for vacations. An investment property, or rental property, is a property you rent out to generate income.One key difference between a second home and an investment property is how much time you spend in it. For tax purposes, a second home is considered an investment property if you live in it for 14 days or fewer per year, or less than 10 percent of the days you rent it out per year.

Why refinance your second home

Here are some common reasons to refinance a second home:

• Getting a lower interest rate, which generally lowers your monthly payment and saves you interest overall
• Extending the loan term to get more time to pay off the mortgage
• Tapping the home’s equity to make upgrades, pay college tuition or meet other financial goals

There are two primary ways to refinance a second home:

• Rate-and-term refinance: Rate-and-term refinancing replaces your current home loan with a new one that has a different interest rate, different loan term or both.
• Cash-out refinance: A cash-out refinance replaces your existing mortgage with another, bigger home loan, allowing you to pocket the difference between the two loans in cash.

How to refinance a second home or investment property

Whether it’s your first home or your third rental property, mortgage refinances usually hinge on the cost. If you’re doing a rate-and-term change, no matter what the property is used for, you need to make sure you’re saving enough money to make the refi cost-effective. If you’re doing a cash-out refinance, you need to make sure the new terms are suitable.

“Borrowers should always ask the pertinent questions about how much is the cost of the refi, how much will it take to recoup the closing costs,” says Julienne Joseph, senior advisor for Homeownership at the Office of the U.S. Housing and Urban Development Secretary.

Evaluate the lender’s responses carefully to make sure the refinance will actually help you achieve your financial goals.It’s important to compare quotes from at least three mortgage refinance lenders. It might make sense to start with your existing lender to learn what you qualify for there, and after that, search for better offers.

Differences between refinancing a second home versus primary residence

Even though the main goals of any refinance are the same, refinancing is more complicated if you own more than one property. Here are some key differences:

• Second property refinances are seen as riskier. Lenders consider non-primary residences riskier investments than a borrower’s main home, and investment properties are viewed as riskier still. “With a primary residence, there’s less risk because the presumption is a borrower would make greater strides to preserve the roof that’s over their heads,” says Joseph. “If hardships were to happen, if there was a property they would allow to go into default, the primary residence is the one they’re least likely to do so.”
• Qualifying is tougher. Many lenders have more stringent requirements for refinancing second homes and investment properties, and usually interest rates for those loans will be higher, as well. You might need more equity to refinance a second home or investment property than you would for a primary residence. You might also need to have more cash in reserves.
• Some lenders might shy away. Many mortgage lenders aren’t interested in investment property loans, let alone investment property refinances. Because of this, you might have limited options.

Bottom line

It’s a little more complicated if you’re trying to refi a property that isn’t your primary residence, but that doesn’t mean you can’t benefit if you do your homework. Shop around, find a mortgage that suits your needs and financial goals and crunch the numbers. If all those indicators point in your favor, you could realize long-term savings.