What is the difference between a second home and an investment property? Although they sound very similar, the two types of homes are actually quite different – especially when it comes to their financing.
Oftentimes people will use the terms “second home” and “investment property” interchangeably to describe a home that is not their primary residence. However, there are a number of differences between the two.
What is a Second Home?
A second home is real property that the homeowner intends to occupy in addition to their primary residence for part of the year. Usually, second homes are used as vacation homes. Second homes may also be properties that the homeowner visits on a regular basis.
Examples of second homes may include:
- A condo in a city where you frequently conduct business.
- A beach house that you and your family occupy during the summer months.
- A house in a different state where you have seasonal work.
How is Financing Different for a Second Home?
In order to qualify for a second-home loan, the property is usually required to be located in a resort or vacation area (like the beach or mountains), or be a certain distance from the borrower’s primary residence.
Second-home mortgages may have lower interest rates than investment property loans, but not necessarily. It can all depend on the borrower’s entire financial picture. Generally speaking, lenders consider second homes to be more of a risk than primary residences, but not as big a risk as investment properties.
Second-home loans often include a Second Home Rider along with the mortgage. This rider states certain rules the borrower must abide by in order to qualify for the loan.
These rules often include the following:
- The borrower will occupy and use the property as his/her second home.
- The property will be kept available for the borrower’s exclusive use and enjoyment at all times.
- The property cannot be used as a timeshare or be subject to any rental pool arrangement.
- The property cannot be subject to any agreements that require the borrower to rent the property or give a management firm (or anyone else) control over the use and/or occupancy of the property.
What is an Investment Property?
An investment property is real property that the homeowner uses to generate income, and in most cases, is not occupied by the homeowner at any time. In simplest terms, if you’re buying real estate that will be used to make a profit instead of your own residence, then it is an investment property.
A few examples of investment property include:
- A condo at the beach that you rent out to vacationers.
- A house that you rent to long-term tenants.
- A home you purchased to “flip” (buy and resell in a short period of time).
How is Financing Different for Investment Properties?
In most cases, investment property loans will be more expensive than second home or primary residence loans. This is because they tend to have higher interest rates and require bigger down payments, due to their perceived level of risk.
Buying Multi-Unit Home for Both Primary Residence & Investment Property
What if you want to purchase a home that will be both your primary residence and investment property?
There are some special cases in which the homeowner may occupy one unit in a multi-family home (such as a duplex) and rent out the other unit(s). Those properties are often eligible for traditional financing and do not necessarily require an investment property loan.
For example, you could buy a 2-4 unit property, and as long as you use at least one of the units as your primary residence, you may be able to finance the property through an FHA loan, conventional 30 year fixed rate mortgage, or several other types of loans.
For more information on investment property loans, second home financing, and mortgages for primary residences, talk to one of our professional lending experts. We can help you compare rates and programs and determine which home financing strategy is best for your situation. Give us a call today to receive a free rate quote and personalized consultation.
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