Because mortgage and interest rates are very low right now, many people are refinancing their homes. You may even be thinking, is this the time to invest in a second home elsewhere? A refinance loan, or a refi loan, may be able to help with the process of buying a second home when you do a cash-out refinance.
How Do Refi Loans Work?
When you take out a refi cash out loan, you can use up to 80% of the equity in your first home to fund your second home. You may also find that you can refinance as a whole with a lower interest rate. But all this makes the process sound a little too easy. That’s why we are going to break down some of the qualifications below.
This is what you need to know about refi loans.
How the Equity Works
You won’t just get a check for the full equity of your house and be able to put it down towards a second home. The process works as such: Say you buy a home for $250,000 but now it’s worth $350,000. Since most lenders will typically allow up to 80% equity, we can subtract 20%.
$350,000 – $70,000 = $280,000
First, you need to repay whatever the existing loan has left. Say it’s $50,000. Then, in the end, you have $230,000 to put towards your new home as a refi loan.
Catch the Clause
Keep in mind that you are allowed to use the funds from a refi to buy a second home or a vacation home. However, you cannot use the funds to buy and move into a replacement home that will be used as your primary residence. You must remain living at your original address for at least one year.
If you are looking to use a home’s equity to buy a replacement home, you will need a bridge loan since a refi loan (as mentioned above) doesn’t work. These loans usually have higher interest rates, making them a less popular option.
The Answer Is Yes
You can definitely use a refi loan to buy a vacation or second home. But there are certain stipulations you must follow. Working with one of our team members at Mortgage Solutions Financial can help you understand the requirements and process. Things like breaking down the numbers, knowing those clauses, and helping you find the right loan are what we do best!
Get Started with the Process
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