Reasons Why Mortgage Rates Are Higher on Second Homes

Home owners who have decided to invest in a second property are often surprised that the mortgage rates are noticeably higher. Lenders are more stringent on loan applications for second homes for several reasons, and there are a few things to know beforehand in order to increase your chances of getting a fair rate.

Home Owner Budgets

Mortgage lenders are aware that the expenses of maintaining an additional property will take up more of any borrowwer's take-home pay. This is not only true for the mortgage payments but also for all the necessary upkeep expenses that the second home will require. Most lenders closely examineapplicants' debt-to-income ratios to determine a realistic view of whether the borrowers will be able to make all these added payments on time.

Added Equity Use Rules

Many lenders suggest funding a second home with a home equity line of credit, particularly if the borrower has a good to excellent credit history. However, most offered rates on these equity lines of credit for second homes are at least a couple of points higher than the prime rate, regardless of credit score. Unlike lines of credit used for other purposes, there are also more stringent tax rules when it comes to deducting the higher interest on these second home lines of credit.