What is the Maximum and Minimum Second Home Cash-Out Refinance LTV?
Published July 15, 2022
If you have a second home and need cash for a major expense, you might be considering a cash-out refinance. A refi on your second home can be less risky than taking money out of your primary residence. In this case, you don't risk losing your place to live if you miss payments. You might also choose to refinance your vacation home if you want to secure a lower interest rate or if the property has increased significantly in value.
While the process of applying for a second home refi is similar to the process of applying with your first home, the requirements aren't exactly the same. The key difference is the loan-to-value ratio, or LTV. In most cases, lenders require a higher second home cash-out refinance LTV, which means you must leave some extra equity in the property after refinancing.
Understanding the maximum and minimum second home cash-out refinance LTVs will help you determine how much money you can cash out when you refinance. Here's everything you need to know about LTV requirements on a second home.
Maximum and minimum second home cash-out refinance LTVs
The maximum second home cash-out refinance LTV requirement may vary by lender, but it's almost always 75%. While the maximum LTV for a cash-out refi on a primary mortgage is 80%, lenders require that borrowers keep additional equity on a vacation home or investment property.
If your lender sets a maximum second home cash-out refinance LTV of 75%, you must keep 25% equity in the home after you close. Therefore, a cash-out refi is only a viable option if you currently have more than 25% equity in the property. You should consider how much cash you need and whether you have enough equity in your home to cover it. If, for instance, you have 30% equity in your home, you would only receive up to 5% as a cash payment.
Lenders don't usually set a minimum second home cash-out refinance LTV, which makes a cash-out refi a desirable option for homeowners with a lot of equity. The lower your loan-to-value ratio, the more funds you can cash out on. However, you should always keep in mind that the loan needs to be repaid with interest. It might be tempting to cash out all of the available equity in a nearly paid-off mortgage, but this could greatly extend the amount of time that you make home loan payments.
Cash-out refinance LTV FAQ
The following are some of the most commonly asked questions about second home cash-out refinance LTV requirements.
How does LTV affect my cost and likelihood of getting a refinance?
Lenders want borrowers to retain equity in their home as a means of protection against going underwater on the mortgage. When you have 20% or 25% equity in the property, it's unlikely that you'll go underwater even if the home decreases in value. This prevents your lender from taking the loss in the event of foreclosure.
There is some correlation between LTV and interest rate on a refinance. The higher the LTV, the higher your interest rate could be. When you leave more equity in your home, you may be able to secure a lower interest rate.
How does my LTV affect how much money I can get out of a refinance?
Your second home cash-out refinance LTV has a direct impact on how much cash you can get out of the agreement. If your lender's maximum LTV requirement is 75%, you must keep 25% equity in the home. You can determine how much cash you can get by calculating the difference between 25% of your home's value and your actual total home equity.
For example, if you owe $180,000 on a mortgage for a home worth $300,000, you have 40% equity in the home. You must keep 25%, or $75,000, in the property, which leaves you with 15%, or $45,000, as a cash payment.
What is considered a "good" LTV?
In most cases, an LTV of 80% or less is considered good. However, a second home cash-out refinance LTV of around 75% or 80% would result in you breaking even. In order to get cash out of the deal, you need a lower LTV.
What is considered a "bad" LTV?
An LTV above 80% is not ideal for any form of refinancing. In this case, you should continue making mortgage payments to pay down the loan's principal and consider other forms of borrowing if needed. Your LTV is only a major cause for concern if it exceeds 100%, which means you owe more on your home than you can sell it for.
How much equity is needed for a cash-out refinance?
For a primary residence, lenders usually require at least 20% equity. For a second home or investment property, lenders typically require 25%. The most common exception is a VA loan, which allows a cash-out refi LTV of up to 100%.
What other guidelines should I know before getting a cash-out refi on an investment property?
A second home used as an investment or rental property may have slightly different refinancing guidelines than a personal vacation home. To assess whether the property is a second home or an investment property, your lender will confirm that you occupy the home for part of the year and that you don't have any long-term agreements with tenants or management companies.
A cash-out refi on an investment property still has a maximum LTV of 75%, so you'll need more than 25% equity in the home to take cash out. Your lender may also require a credit score of 680 or higher. Lenders often require proof of cash reserves to confirm that you can cover your mortgage payments for an extended amount of time if you were to lose your rental income.
Navigating a refinance on your second home can be challenging as there are so many specific guidelines set by each lender. Although the second home cash-out refinance LTV requirement is almost always 75%, other factors may vary from lender to lender. Be sure to work with a lender you trust so that you secure a favorable loan.