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<p><em>Viral Shah (Better Mortgage’s Head of Capital Markets) explains how an adjustable-rate mortgage works.</em></p>

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Choosing a mortgage type is one of the many decisions a homebuyer needs to make – and it’s a big one. After the 2008 housing crisis, many buyers were wary of adjustable rate mortgages (ARMs). But in instances where you’re planning on selling your home within 10 years, [they could be the better option](https://better.com/content/so-youre-considering-an-adjustable-rate-mortgage/).

Here’s a quick overview of what an adjustable rate mortgage is:

<h2>How do ARMs work?</h2>

While traditional fixed rate mortgages have the same rate for the entire life of the loan (typically 15, 20, or 30 years), adjustable rate mortgages (ARMs) are a bit different. ARMs have an initial fixed period where you will pay a fixed interest rate, followed by an adjustable period where the interest rate fluctuates. Current conforming ARMs use an index rate called the Secured Overnight Financing Rate (SOFR) to guide these adjustments. 

<strong>Naming:</strong> (Fixed period in years / number of adjustments per year). For example, *10/6m* means 10 year fixed with adjustments every 6 months after that. 

<strong>Fixed period:</strong> You’ll choose from a 5-year, 7-year, or 10-year fixed period, typically based on how long you expect to live in the house. After the fixed period, the rate adjusts twice per year (every 6 months).

<strong>Adjustable period:</strong> After the fixed period is over, the rate will adjust every 6 months based on the following formula: 30 day average of SOFR (Index) + (Margin). Investors set the value of the margin but it is typically between 2.75% and 3%. Regardless of what value is used, the margin always stays the same, but the value of the SOFR index will vary. The SOFR index is maintained by the New York Federal Reserve and can be accessed directly on the NY Fed website or on sites like the Wall Street Journal and its value changes daily. As of 2/22/2021, the 30-day average SOFR was 0.045%, which would mean your ARM loan interest rate could be .045% (Index) + (Margin) or between 2.795% and 3.045%.

<h2>How much can the rate move?</h2>

ARMs have “caps,” which limit the amount that the rate can increase. This protects you against sharp moves if you move into the adjustable period.

<strong>Initial Adjustment Cap:</strong> The most the total rate can increase by in the first adjustment period. Typically 2% for 5/6m ARMs and 5% for 7/6m or 10/6m ARMs.

<strong>Subsequent Adjustments Cap:</strong> The most the total rate can increase by in subsequent adjustments periods. Typically 1%.

<strong>Lifetime Adjustment Cap:</strong> The most the rate can increase above the initial fixed rate — ever. Typically 5%.

For example: If your initial 5/6m ARM fixed rate was 3%, once the fixed period is over, it can’t increase more than 4% every year, nor can it ever exceed 8% in total.

<h5>Example rates based on the current interest rate environment:</h5>

![Example Rates Based on the Current Rate Interest Environment](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fc8f48b0ce4ac43adbb003487ac4f1a6c)
<p class="legal">This table is for illustrative purposes only.</p>

At Better Mortgage, we recommend considering an ARM only if you’re reasonably certain you’re going to sell your house in 10 years or less: [here’s why](https://better.com/content/so-youre-considering-an-adjustable-rate-mortgage/).

If you’re curious about what ARM rates are like today, take a look at our [Rate Quote Tool](https://better.com/mortgage-rates/purchase). We’re here to help you figure out which option is right for you.

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<p class="legal">This blog is for informational purposes only and should not be used for legal or financial advice.</p>

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While traditional fixed rate mortgages have the same rate for the entire life of the loan (typically 15, 20, or 30 years), adjustable rate mortgages (ARMs) are a bit different.

What is an ARM?

Blog post image for What is an ARM?

<p><em>The Loan Estimate is intended to provide a clear and concise summary of the terms and costs associated with any loan. Here’s how to read it with confidence.</em></p>

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<p><br><br> <br />
The Loan Estimate (LE) provides a clear and concise summary of the terms of your loan to help you understand the features, costs and risks associated with your mortgage as required by the Consumer Finance Protection Bureau (CFPB). Before moving forward with any lender, you should be sure to compare and understand your Loan Estimate.  </p>

<h2 id="yourinitialle">Your initial LE</h2>

<p>This is page 2 of sample LE in the CFPB-approved format. Make sure your lender provides an estimate in this format. Anything that looks different is not an official Loan Estimate.</p>

<p><a href="https://better.com/start"><img src="https://media.better.com/content/prod/2016/12/LE-page-2-no-annotation.png"></a> <br />
<em><p style="font-size:1.4rem;">Page 2 of the LE details your loan costs</p></em></p>

<h2 id="tipsforcomparinglesfromdifferentlenders">Tips for comparing LEs from different lenders</h2>

<p>Here are a few things to look out for: </p>

<h4 id="1thirdpartyfeesappearingononelendersleandnotanothers">1. Third-party fees appearing on one lender’s LE and not another’s</h4>

<p>You should raise this with your Mortgage Expert. While the fee amount can vary, the types of third-party fees associated with a loan are fairly constant. One lender may be missing something. </p>

<h4 id="2differencesinloanamountforarefinance">2. Differences in loan amount for a refinance</h4>

<p>A lender may increase your loan amount slightly to create a “<a href="https://better.com/content/no-cost-mortgage/">no closing cost loan</a>”. Borrowing a little more than the payoff on your current loan is one way to offset fees at the closing table, but this is increasing your debt to pay for your closing costs; it does not make them go away.  For an apples-to-apples comparison across lenders, you should get LEs with identical loan amounts.</p>

<h4 id="3promisesofcreditsafterclosethatdonotappearonthele">3. Promises of credits after close that do not appear on the LE</h4>

<p>This is a major red flag. The purpose of the LE is to create transparency and accountability. You lose both by transacting outside of the standard disclosure.</p>

<h4 id="4increasingcostsduringachangeincircumstance">4. Increasing costs during a change in circumstance</h4>

<p>Some lenders may advertise attractive rates and fees for one product, then switch into something less competitive (<a href="https://better.com/content/dont-take-the-bait-heres-the-reality-of-refi-rates/">bait-and-switch</a>). You should ask about any additional fee and look at the relative competitiveness of the new product by continuing to shop before locking.</p>

<h2 id="abetterway">A Better way</h2>

<p>Better Mortgage is committed to a transparent and efficient mortgage process. Contact us by email (<a href="mailto:hello@better.com">hello@better.com</a>), phone (<a href="tel:888-501-3186">888-501-3186</a>), or chat with us via <a href="https://better.com/">Better.com</a> with any questions about your LE. We are happy to walk you through competing offers and answer any questions. No pressure, no sales — just a fast, easy and transparent process.</p>

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Your loan estimate is a summary of the terms and costs associated with your loan. Learn how to read and understand it with confidence.

A quick guide to your Loan Estimate

Blog post image for A quick guide to your Loan Estimate

<p><em>If you refinance or sell your home in the average time frame, taking lender credits to offset your closing costs (a.k.a. a no-cost mortgage) will save you money in comparison to paying points.</em></p>

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<p><br> <br />
“Taking credits” refers to the practice of accepting a higher interest rate (and therefore higher monthly payments) in exchange for cash to offset your closing costs. If you take enough credits to offset all closing costs, this results in a “no-cost mortgage.” </p>

<p>The flip side of taking credits is “paying points,” which means paying a percentage of your mortgage balance upfront in exchange for a lower interest rate and lower monthly payments. </p>

<p>The typical cost of changing your rate by 0.125% is 0.625% of your loan amount. So on a $400,000 loan, if you took a rate increase of 0.125%, you would receive $2,500 in credits. If you reduced the rate by 0.125%, you would pay $2,500 in points.</p>

<blockquote>
  <p>There are many factors that determine whether paying points or taking credits is right for you. However, perhaps the most important one is how long you keep your mortgage without fully repaying it by selling your home or refinancing.</p>
</blockquote>

<p>By taking credits, you will save money early on by reducing your closing costs. But there will be a time in the future when you will lose money (compared to paying points) by paying the higher interest rate. The gamble is whether you get out of your mortgage before the time when you break even.</p>

<h4 id="figureifyoutakecreditsyouwillsavemoneyearlyinyourmortgagetermbyoffsettingclosingcosts">Figure: If you take credits, you will save money early in your mortgage term by offsetting closing costs.</h4>

[![ Graph: Years on X Axis and Total Savings If You Pay Points on Y Axis](https://media.better.com/content/prod/2016/09/concept-take-credits.png)](https://better.com/start) <br />
<em><p style="font-size:1.4rem;">This graph illustrates the concept of taking credits.</p></em>

<p>By paying points, you will lose money at the start by paying the closing costs. But there will be a time in the future when you break even and start to save money by paying the lower interest rate. If you leave your mortgage before that time, you lose money. The gamble is whether you will stay in your mortgage long enough to reach the time when you break even. </p>

<h4 id="figureifyoupaypointsupfrontyouwilllosemoneyearlyinyourmortgageterm">Figure: If you pay points upfront, you will lose money early in your mortgage term.</h4>

[![ Graph. Years on X Axis and Total Savings If You Pay Points on Y Axis](https://media.better.com/content/prod/2016/09/concept-pay-points.png)](https://better.com/start) <br />
<em><p style="font-size:1.4rem;">This graph illustrates the concept of paying points.</p></em>

<h2 id="payingpointswasthewrongdecisionformostborrowers">Paying points was the wrong decision for most borrowers</h2>

<p>Historical data tells us that for most borrowers in the last 25 years, paying points has been a bad decision. Recent research using data from 1990-2015 found that on average, borrowers have kept their mortgages only five years (<em>Agarwal, Ben-David, and Yao (2016), Journal of Financial Economics</em>). </p>

<p>Historical data from Freddie Mac is consistent, showing the majority of borrowers have refinanced, sold, or otherwise closed their mortgage within six years.</p>

<h4 id="figurethemajorityofloansinthefreddiemacdatasethavebeenactivelessthansixyears">Figure: the majority of loans in the Freddie Mac dataset have been active less than six years</h4>

[![ Graph. Number of Years Since Origination on X Axis and Loans Still Active (%) on Y Axis](https://media.better.com/content/prod/2016/09/loans-active.png)](https://better.com/start) <br />
<em><p style="font-size:1.4rem;">Fraction of loans still active out of the cohort originated in any given year. For instance: out of the loans originated in 2008, less than 40% were still active four years later. The other 60+% had refinanced, foreclosed, or sold.</p></em>

<blockquote>
  <p>What this means is that those who paid points usually left their mortgages before the break-even line, and therefore lost money. Had they taken credits (or a no-cost mortgage) instead, they would have saved money.</p>
</blockquote>

<p>While you might think this finding is due to the time-period studied and interest rate trends over that time, the authors of the research also ran an ex-ante simulation. Given the break-even nature of paying points, those who paid points should have been less mobile on average (e.g., slower terminations for non-rate-based reasons) than those who did not pay points. However, the research concluded that points-payers did not keep their mortgages a statistically different amount of time than non-points-payers.  </p>

<h2 id="sowhenshouldyoupayforalowerrate">So, when should you pay for a lower rate?</h2>

<p>There are a few scenarios where it does make sense to pay out of pocket for points:</p>

<ul>
<li>You think it’s really unlikely that you will move or refinance for a very long time.</li>
<li>Your projected income is going down in the future, meaning you would not be able to qualify for a similar mortgage.</li>
<li>Your tax rate this year is much higher than what you expect in future years. You want to deduct as much as possible when your tax rate is high, and points are deductible against income in the year you get the mortgage.</li>
</ul>

[![ Got More Questions? Our Free Guide Has the Answers. Sign Up to Download](https://media.better.com/content/prod/2017/10/FTHB_adforblogB-1.png)](https://better.com/content/the-guide)

<h2 id="runyourownscenario">Run your own scenario</h2>

<p>In the end, whether to pay points or take credits is a complex question. Things you probably rarely consider (like your future marginal tax rate) affect whether you should pay points or take credits in your particular situation. To make it a bit easier, we’ve provided a calculator that will help you explore different scenarios and make your own determination.<sup id="fnref:1"><a href="#fn:1" rel="footnote">1</a></sup> </p>

<p>The projected break-even time will be your guide. If you are considering paying points, you should do so only if you have a high level of certainty that you’ll stay in the mortgage longer than that. You are confident you won’t move, sell your house, pre-pay your mortgage, refinance for a better rate, take cash out for renovations, etc.</p>

<p>If you think any of the above scenarios might happen sooner than that, taking credits is likely a better option.</p>

<div id="widget-element"></div>  

<script src="https://media.better.com/widgets/pay-points.js"></script>

<h2 id="getaratequote">Get a rate quote</h2>

<p>You can <a href="https://better.com/start">get a personalized rate quote</a> from Better Mortgage in minutes, without affecting your credit score. </p>

[![ A Better Mortgage Starts with Better Information. Get a Better Mortgage](https://media.better.com/content/prod/2017/05/blog_nocostmortg_CTA@2x-1.png)](https://better.com/start)

<p>Every rate quote will provide options for paying points and taking credits, including a no-cost option. Try it and see which option is best for you.</p>

<div class="footnotes"><ol><li class="footnote" id="fn:1"><p>The calculator is provided for demonstrative purposes only. <a href="#fnref:1" title="return to article">↩</a></p></li></ol></div>

Historical data tells us that for most borrowers in the last 25 years, paying points has been a bad decision.

Why a no-cost mortgage is better

Blog post image for Why a no-cost mortgage has historically been the best choice for most borrowers: try our interactive tool

Why a no-cost mortgage has historically been the best choice for most borrowers: try our interactive tool

![Second home vs Investment Property](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F1af699dbb3d04c589790f3da308c47e2)

 ## What You’ll Learn

<p class="learnfont">A second home is a property you buy to use primarily as a vacation space for part of the year.</p>

<p class="learnfont">An investment property is a home you buy when you want to earn rental income, and not use the property yourself.</p>

  <p class="learnfont">Mortgage requirements and tax treatments differ for second homes and investment properties, so you’ll need to decide how you plan to use the home in advance.</p>

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  <br><br>

Pursuing a real estate investment can be an exciting venture, even if this isn’t your first time going through the paces. But if you intend to get a mortgage, you’ll need to decide exactly how you’ll use the home — as a personal vacation spot or to generate income from rentals.

Second homes and investment properties each have home loan and tax requirements. So, here’s what you should know if you’re trying to decide which [property type](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/) may be best for your goals. 

## What is considered a second home?
A [second home](https://better.com/content/buying-a-second-home/) is typically thought of as a vacation home, or one you intend to use on a part-time basis. A second home must meet the following criteria to qualify for a second home loan:

The property must be suitable for year-round occupancy, even if you only intend to use it for part of the year.

&#8226; The home must be a single-unit dwelling.
&#8226; The property typically must be located at least 50 miles from your primary residence.
&#8226; You must have exclusive control over the property, without any timeshare or long-term rental agreements.
&#8226; The home may not be under the control of a property management company.


## What is considered an investment property?
An [investment property](https://better.com/content/investment-property-loans-5-things/) is also known as a rental property. Rather than occupying the home yourself, an investment property should be leased to tenants to generate rental income. Here are the requirements for investment property loan eligibility:

&#8226; The property cannot be owner-occupied.
&#8226; The home can have more than one unit, with up to four units allowed.
&#8226; You can rent out the property.
&#8226; The property can be located within 50 miles of your primary residence.
&#8226; A property management company can manage the home.


<br> 

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 ## Tax implications for a second home vs. investment property
When it comes to taxes, second homes are treated similarly to your main home or [primary residence](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/). You’ll typically be allowed to write off mortgage interest up to the [$750,000 limit](https://turbotax.intuit.com/tax-tips/home-ownership/buying-a-second-home-tax-tips-for-homeowners/L5Mzc5URo "external"). However, if you have multiple properties, you can only deduct up to $750,000 in mortgage interest between them. The limit is not per property. Instead, it is a total deduction amount.

On the other hand, investment properties may allow for more freedom regarding [eligible deductions](https://www.bankrate.com/mortgages/second-home-vs-investment-property/ "external"). Owners may deduct any amount of mortgage interest, as well as certain expenses, including:

&#8226; Property taxes
&#8226; Utilities
&#8226; Advertising costs
&#8226; Maintenance costs and supplies
&#8226; Insurance costs
&#8226; Depreciation

Because tax laws can be complex, it may be worthwhile to speak with a tax professional who can review the potential tax implications of either type of property. You may also wish to review [tips from the IRS]( https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping) on rental real estate income, deductions, and recordkeeping.

## What to know before buying a home as an investment
Any investment deserves thorough consideration, and real estate is no different. Before jumping in, you’ll want to look at how often you intend to use or rent the property and whether an additional mortgage fits into your budget. Both property types will also require expenses for upkeep and maintenance that should be factored into your decision.

## Is buying a second home a good investment?
[Buying a second home](https://better.com/content/buying-a-second-home/) can potentially be a good investment as you may gain [home equity](https://better.com/content/home-equity-vs-refinance) if the home's value increases over time. You may also be able to rent out the property when you’re not using it. However, rentals are limited to a maximum of 180 days per year. 

Keep in mind that projected rental income cannot be used to help you qualify for a second home loan. So you’ll want to confirm you’ll be eligible given your current income and financial situation. 

To qualify you'll need:

&#8226; A good-to-excellent credit score
&#8226; A down payment of at least 10%
&#8226; Enough money in liquid savings to cover the mortgage for a few months if need be.

## Investment property vs second home: Which offers better rental income?
An [investment property](https://better.com/content/investment-property-loans-5-things) may be a good match if you prioritize generating money by collecting rent from tenants. You’ll also benefit from home equity, as the property’s value increases over time or due to upgrades.

However, mortgage requirements for investment homes can be more stringent and costly than other mortgage types. These home loans also usually come with the highest interest rates, credit score requirements, and liquid asset conditions of all occupancy types. This is because investment properties tend to have higher delinquency rates than other property types — which means increased risk for mortgage lenders. 

You’ll also typically need at least 10% of the purchase price for a down payment, though you may be able to use projected rental income to help you qualify for a mortgage. 

## Can I convert a second home into an investment property?
While converting a second home into an investment property may be tempting, there could be restrictions on doing so if you have a mortgage. 

Most lenders will require you to sign a document that states how you intend to use the property. Falsifying information on that document may count as mortgage fraud, which can be punishable by fines or prison time. 

Therefore, it’s best to decide how you want to use the home before applying for a mortgage.

## Explore your next property purchase with Better Mortgage
Whether you decide a second home or investment property is best for you, Better Mortgage can help you take the next step. 

With our streamlined digital process, you can be pre-approved for a mortgage in as little as 3 minutes.

<br> 

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Discover the nuances of buying a second home versus an investment property and which option may be best for your goals.

Second Home vs Investment Property: What's the difference?

Blog post image for Second home vs Investment Property: What's the difference?

Second home vs Investment Property: What's the difference?

![Young Laughing Couple and Black Labrador Retriever Sitting at the Corner of a Wooden Bench](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F4787a98b82954f34b61de645da2f2b3c)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">There’s no limit on the number of times you can refinance
</p>

<p class="learnfont">What you should consider before refinancing multiple times</p>

  <p class="learnfont">How to decide if this is an ideal time to refinance</p>

  </div>
  <br><br>

[Refinancing your mortgage](https://better.com/content/better-guide-to-refinance/) can be an effective money-saving strategy, and there’s technically no limit on the number of times you can refinance—but that doesn’t mean you should be rushing to refinance on a regular basis. Each refinance comes with a unique set of pros and cons, and you need to be sure that the savings you stand to gain from your new loan outweigh the upfront costs involved with refinancing. Even if it’s not your first refinance rodeo, you should still do your due diligence in measuring the upfront costs against the long-term benefits before you saddle yourself to new debt. 

If you need to refresh your refinance IQ, you can check out our [step-by-step refinance guide](https://better.com/content/6-steps-to-refinance/) or [ common refinancing myths](https://better.com/content/8-myths-about-refinancing/). Otherwise, let’s cover some of the basic questions about repeat refinancing: how often can you do it, and how do you decide if it’s a sound financial decision?

<h2>What are the main refinance requirements?</h2>

First things first—are you even qualified to refinance? Just like when you originally worked with a lender to buy your home, you’ll need to go through an approval process to refinance the terms of your mortgage. This involves many of the same steps as your original financing experience (minus the house hunt) like sharing financial documentation with your lender. 

You’ll also need to meet some basic minimum requirements to be eligible for refinancing. For conventional loans this typically means a credit score of at least 620 and a [DTI (debt-to-income) ratio](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/) no higher than 43%. On top of that, you’ll likely need at least 5% equity in your home. If your LTV (loan-to-value) ratio is less than 20%, you may not be able to qualify for quite as competitive interest rates, and you may have to pay mortgage insurance to offset the additional risk of your refinance. To get a more detailed breakdown of documentation and refinance requirements, [review this checklist](https://better.com/content/what-documents-will-i-need-for-my-mortgage/). 

<h2>How many times can you refinance your mortgage?</h2>

As we said, there’s no official limit to the number of times you can refinance your mortgage. Refinancing depends on your unique situation—your loan terms, your lender, and the type of home loan you have and plan to get. But there are typically rules around when you are eligible for a refinance and how frequently this process can take place. 

Lenders often have “seasoning” guidelines in place, which are black-out periods for how soon you can refinance your mortgage after buying a home, as well as how soon you can refinance after refinancing. These guidelines aim to discourage “flipping” homes (homes that are purchased, renovated quickly, and sold as fast as possible) and encourage borrowers to establish a stable payment history.

<h3>Does refinancing your mortgage depend on your current loan?</h3>

If you have a [conventional mortgage](https://better.com/content/types-of-mortgage-loans/), there are typically no restrictions between when that mortgage was closed and when you can refinance as long as you’re not taking cash out.

Government-backed loans (e.g., FHA, VA, and USDA) impose a refinance waiting period between six and seven months, depending on the loan issuer. Additionally, borrowers must make payments on time for at least three months, and there must be a demonstrated benefit to the refinance (usually a minimum of 0.5% reduction in interest rate).

<h3>Does refinancing your mortgage depend on your current lender?</h3>

While some lenders require seasoning periods (six months is common), you may be able to refinance using a different lender, as long as you qualify for the loan’s standard underwriting requirements.

<h3>Does refinancing your mortgage depend on the type of refinance?</h3>

Your refinancing goals can also dictate how often you’re eligible to refinance your mortgage. For example, [cash-out refinances](https://better.com/content/cash-out-refinancing-gives-you-options/), where you access cash by tapping into your home equity, require a 6-month waiting period before you can refinance again. And because taking cash out depends on how much equity you have built up over time, these types of refinances tend to happen less frequently. 

As a refresher: Your equity is the difference between the value of your home and the amount you still owe on your mortgage. You can determine your percentage of equity by dividing your equity by the value of your home. Most lenders require you to have at least 20% equity in your home to be eligible for a cash-out refinance. This helps discourage borrowers from getting into a risky situation where they are overly saddled with mortgage debt. 

Rate and term refinances are slightly different. In this scenario,  you are just reducing your rate and resetting the loan term, and you can apply for these kinds of refinances without any waiting periods. In a volatile market, interest rates can sometimes drop quickly. Taking advantage of these rate decreases can mean paying thousands of dollars less in interest over time. Just be sure you factor in the upfront costs and get a sense of your breakeven point before committing to a new loan term. 

<h2>What should you consider if you plan to refinance again?</h2>

<h3>Your credit will be impacted</h3>

When you refinance, lenders must process a “hard credit pull” to verify your credit score. Hard inquiries may impact your score for up to a year for an average drop of five to ten points. If you’re trying to maintain a certain credit score to meet a lender refinance requirement, or if your credit score already prevents you from qualifying for a competitive interest rate, you may want to wait until your credit score or financial circumstances have improved.

If you’re thinking about refinancing twice within a 12-month period, you’ll want to ensure that your credit score is in good enough shape to withstand another minor dip when you apply for your next refinance.

Keep in mind, when shopping for lenders and rates, as long as all potential lenders pull your credit within the same two- to four-week period, the hard inquiry will only count once on your score.With Better Mortgage, you can see what rates you qualify for in minutes and with only a soft credit check, which won’t impact your score. The hard credit check happens once you’re ready to lock your rate. 

<h2>Refinance savings should outweigh costs</h2>

Refinancing only makes sense if you plan to live in your home long enough to enjoy the financial benefits. . . That means you’ll need to determine the break-even point of your refinance by calculating how long it will take to offset your initial investment and start reaping the rewards of refinancing.  

Every home loan includes [closing costs](https://better.com/faq/refinance-loan-costs/how-much-will-my-closing-costs-be), which are usually around 2-5% of your loan balance. If you plan to refinance again or sell your home before you realize the savings, then a refinance will, ultimately, cost you money—not help you save it.

Even if you choose a no-cost refi option, where out-of-pocket costs are rolled into your loan, you’ll still want to consider the impact of their additional expense. Note that [no-cost refinances](hhttps://better.com/content/what-is-a-no-closing-cost-refinance/) do not mean your closing costs are non-existent; instead, they’ll be applied to your loan balance and thus incur interest.

Our [break-even refinance calculator](https://better.com/content/refinance-calculator/) can help you discover how quickly you’d recoup any closing costs and fees on a new refinance.

Keep in mind, closing costs include fees for third-party services, such as the appraisal, title search and insurance, and credit report. Many lenders also charge loan origination, application, and underwriting fees but you can [avoid those kinds of costs](https://better.com/content/cost-and-lender-fees-in-mortgage-process/) by working with Better Mortgage. We’ve built technology to streamline the entire mortgage process from start to finish, making it less expensive to generate your loan. Naturally, we pass on the dollar and time savings on to you. 

<h2>You may get charged a prepayment penalty</h2>

Some mortgages come with prepayment fees for paying off your mortgage ahead of schedule. This is a fee charged if you pay the loan before the prepayment period has passed by paying off in cash or refinancing with a new loan. You’ll want to check your current mortgage terms to ensure there’s no mention of a prepayment penalty.

If there is a penalty, you should add the fee to the cost of the refinance to make sure paying it early is worth the expense.

<h2>Is now the right time to refinance again?</h2>

General wisdom says you shouldn’t base your home financing decisions on “timing the market”—there are tons of external factors that can influence rates, and there’s no realistic way to effectively anticipate all the variables at play. The primary factor in determining whether you should refinance your home should always be your present financial needs. Common scenarios may include:

<h3>Consider a refinance if you need access to cash</h3>

A cash-out refinance could be just the ticket if you need to fund a major expense, such as a home renovation or debt consolidation.

If you have enough equity in your home, you’ll be able to take out a new mortgage in excess of what you owe—and you’ll receive the difference in cash.

<h3>Consider a refinance if your credit score drastically improved</h3>

Perhaps you paid off some major debt, which shot your credit score to new heights.

If your credit has improved significantly since the last time you refinanced, then you may be able to qualify for a better rate. Locking in a more competitive rate can help reduce the cost of your monthly mortgage payment and save you thousands of dollars over the life of your loan. 

<h3>Consider a refinance if you need more room in your monthly budget</h3>

If other monthly expenses have piled up, and you need more space in your budget, then refinancing can help alleviate the burden of a high monthly payment. A rate-and-term refinance can offer the opportunity to decrease the amount you owe each month through a lower interest rate, extended loan term, or both.

Whenever you refinance, you hit “reset” on the length of time you will be paying your mortgage and interest. For example, if you are five years into paying off your current 30-year mortgage and you refinance to a new 30-year term, you’re essentially adding five more years of payments to your debt timeline.

This might not seem like a smart move at first, but again, it depends on your financial needs and goals.In this case, there are pros and cons. By extending the remaining balance of your mortgage over a longer time frame, you can reduce your monthly payment amount.

So if freeing up cash in your monthly budget for bills or other expenses is a priority, refinancing can help you achieve that goal.

<h3>Consider a refinance if interest rates have dropped and you can save on your monthly payments</h3>

Interest rates are influenced by things like economic uncertainty, recession, or changes in monetary policy by the Fed. That means they are constantly fluctuating and hard to predict. How are you supposed to know when a dip in rates is worth refinancing? The truth is that everyone will have a different threshold in what qualifies as worthwhile—for some a savings of even 1% might be enough. If you’re refi-curious, ask yourself what your personal threshold is and be on the lookout for telltale signs that interest rates might be about to swing downwards. Being ready to pull the trigger can help you pounce on an opportunity.  

<h2>Ready to refinance?</h2>

If you’re interested in lowering your interest rate, shortening your loan term, or tapping into home equity for cash, refinancing could help you unlock your financial goals.. Whether this is your first time refinancing  or you’ve done it before, Better Mortgage offers competitive rates and a streamlined online process that helps you find the best loan options possible. 

<br>

Get started to find out how much money you can save by refinancing.

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapproval/refinance">Apply for your refi in just 3 minutes</a>  
 </div>

<h2>More resources</h2>

- [Can a borrower refinance from another loan type (FHA/VA/USDA) to a conventional loan?](https://better.com/faq/refinancing-your-mortgage/can-a-borrower-refinance-from-another-loan-type-fha-va-usda-to-a)
- [How many times can I refinance with Better Mortgage](https://better.com/faq/refinancing-your-mortgage/how-many-times-can-i-refinance-with-better-mortgage)
- [What is the maximum cash out refinance formula?](https://better.com/faq/cash-out-refinance/what-is-the-maximum-cash-out-refinance-formula)

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How often can you refinance your home loan? While there’s no limit, there are some things to keep in mind. Here’s what you should know before refinancing, again.

How Often Can You Refinance Your Home Loan?

Blog post image for How often can you refinance your home loan?

How often can you refinance your home loan?

![timeline hero](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F2441b26839fa46c1b6e11e127df42512)

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  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">The steps involved in the homebuying process</p>

<p class="learnfont">How long you can expect the homebuying process to take</p>

  <p class="learnfont">What your role will be in each step of the process</p>

  </div>
  <br><br>

You’ve been thinking about buying a home for months—maybe even years. Now that you’re ready, you’re probably wondering how long it will take until you get to pick up the keys. Of course, the time it takes to find a home you love is going to vary, but the average timeline to close a mortgage is just [42 days](https://www.elliemae.com/about/news-reports/press-releases/refinances-soar-as-30-year-note-rate-continues-to-decline-in-august-according-to-latest-ellie-mae-origination-insight-report#:~:text=About%20the%20Ellie%20Mae%20Origination%20Insight%20Report&text=The%20closing%20rate%20is%20calculated,months%20from%20application%20to%20closing. "external"). At Better Mortgage, our modern online process makes it even faster; our average closing time is just [32 days](https://better.com/with/claims). 

To help you know what to expect at each step along the way, we’ve laid out a typical timeline for a homebuying journey—along with some tips and insights to help keep things moving smoothly.  Here’s what you can expect.  

## Homebuying timeline

- [Mortgage pre-approval  – 1-3 days](#1)
- [Home search – 1-20 weeks](#2)
- [Make an offer on a Home – 1-2 days](#3)
- [Mortgage application – 1 hour ](#4)
- [Loan processing – 3-4 weeks](#5)

    - [Appraisal – 1-7 days](#6)
    - [Inspection – 1-7 days](#7)
    - [Title search & title insurance – 1-2 weeks](#8)
    - [Underwriting – 10-15 days](#9)

- [Closing disclosure – 1 day](#10)
- [Final walkthrough – 1-4 hours](#11)
- [Home closing – 1 day](#12)

<div id="1"></div><h2>Mortgage pre-approval: 1–3 days </h2>

<h4 class="subhead">(As little as 3 minutes with Better Mortgage)</h4>

While most homebuyers kick off their search by browsing listings online, it's smart to get [pre-approved](https://better.com/content/what-is-a-mortgage-pre-approval/) for a loan before you start going to open houses. This will help you determine your price range and give you more leverage when you’re ready to make an offer. Most sellers ask for a pre-approval letter as proof that you’ll be able to receive financing if your offer is accepted. In most cases, getting a pre-approval takes 1 to 3 days. However, with the Better Mortgage [online pre-approval](https://better.com/preapprovals/purchase) system, you can get your letter in as little as 3 minutes. 

First, we’ll ask you about your income and assets and do a soft credit pull (don’t worry, this won’t affect your credit score). Next, our technology will instantly match you with the best mortgage options available based on your information. And that’s it—you now have a free, no commitment pre-approval letter that gives you an accurate estimate of your homebuying potential.

<br>
 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapprovals/purchase">Learn more</a>  
 </div> 
<br>

<div id="2"></div><h2>Home search: 10 weeks</h2>

Once you have a pre-approval letter in-hand, get ready for the fun part: house hunting. It’s time to start looking at listings and work with your real estate agent to pick the homes that catch your attention. Incidentally, if you need help selecting a qualified, knowledgeable real estate agent to help in your search, our affiliate at [Better Real Estate](https://better.com/realestate) can match you with a top agent in your area. Plus, if you work with a Better Real Estate agent and choose to finance with Better Mortgage, you could save $2,000 on closing costs*. This is just one of many ways we’re making buying your new home more affordable.

It’s hard to predict how long it will take to find the right home. You could very well get lucky and find your dream home on day one—or it could take several months. Ultimately, the timing will depend on several factors, like available inventory in your desired area and your specific preferences. The National Association of Realtors’ [2020 Generational Trends Report](https://www.nar.realtor/sites/default/files/documents/2020-generational-trends-report-03-05-2020.pdf "external") found that homebuyers typically look at around 9 listings over 10 weeks before they find the right one. 

<div id="3"></div><h2>Make an offer on a home: 1–3 days</h2>

Ok, so now you’ve found the one. From here, it may only take a few hours to discuss the terms of your offer with your real estate agent before it’s submitted. But, it’s after you submit the offer that the real nail-biting begins. Sellers aren’t required to respond within a specific period of time, but most will either accept, reject, or counter your offer within 24 to 48 hours. In cases of multiple offers or a foreclosure, things could take a bit longer. 

Communication mostly happens over the phone between buying and selling agents, so you’ll likely be waiting on your agent for the latest status updates. Once you hear back, you may have to negotiate back and forth on things like price, [contingencies](https://better.com/content/what-is-a-mortgage-contingency-and-why-is-it-important/), and closing date until you come to an agreement with the seller. 

<div id="4"></div><h2>Mortgage application: 1 hour</h2>

When the seller accepts your offer (congrats!), you’ll start the process of officially getting approved for your home loan. The application usually asks questions about the property and [occupancy type](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/) as well as your employment history and finances. Within 3 days of submitting your application, a lender must provide you with a “[loan estimate](https://better.com/content/a-quick-guide-to-your-loan-estimate/)”—which is a standardized document that contains your monthly payment, interest rate, and other associated costs of your mortgage. 

From here, you’re ready to make the purchase official! First you’ll select the right home loan type and term and then [lock in your interest rate](https://better.com/content/why-locking-your-mortgage-rate-wont-box-you-in/). Then head through the processing and closing of your loan and onto owning your dream home.

PS: We’ve expedited the process at Better Mortgage, so you can complete your online application and lock your rate in as little as an hour—and we provide an instant loan estimate all the way back at pre-approval.

<br>
 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapprovals/purchase">Learn more</a>  
 </div>
<br>

<br>

![timeline graphic 3](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F15ea74bf4a434d6f9557ce11f0ca826a)
<p class="legal">*for illustrative purposes only, closing times may vary.</p>

<div id="5"></div><h2>Loan processing: 3–4 weeks</h2>

Once you’ve submitted your loan application, it moves into processing. In this phase, your lender will give you a [list of documents](https://better.com/content/what-documents-will-i-need-for-my-mortgage/) that you need to provide so they can verify all of the information you provided in your application. The quicker you submit them to your loan processor, the quicker your file will move along. 

Processing includes a few steps that often happen simultaneously, including your appraisal, inspection, title search, and underwriting. Here’s what to expect during each: 

<div id="6"></div><h4>Home appraisal: Up to 1 week</h4>

As soon as you pay for your appraisal and lock in your interest rate, your lender will order an appraisal. This is to determine the fair market value of the home you’re about to purchase—in other words, how much it’s really worth. Among other things, appraisers review recent comparable sales of similar homes in your area (aka “comps”) to determine the home’s true value. This report may take a few days to get back. An appraisal is important to ensure that neither you nor your lender are paying more than the home is worth.

<div id="7"></div><h4>Home inspection: Up to 1 week</h4>

A home inspection is a review of the overall condition of a home. It’s a worthwhile step because it can help you catch costly issues or needed repairs before moving forward with the sale. Depending on what’s found, you may choose to request repairs, renegotiate, or cancel the purchase agreement altogether.

If inspections are a part of your contingencies (meaning they’re required for the sale to move forward), these negotiations must take place within the timeframe listed in your contract—so it’s important to get these going as early as possible. The inspections themselves usually only take a few hours, but it can take several days to receive the reports back from the inspectors. Once you have them in-hand, you can determine how to move forward. Perhaps you want a broken window fixed or a handrail replaced—just make sure you know what repairs you’re willing to take on after the home is fully yours. 

<div id="8"></div><h4>Title search and title insurance: 1–2 weeks</h4>

While the inspectors and appraisers are busy with their work, your agent (or in some cases your attorney or loan processor) will order a title search and title insurance. In real estate, a title refers to the legal ownership of the home. A title search is done to ensure that the seller can transfer property ownership to you free and clear. Title issues can arise if there are any outstanding judgments or liens against the current or previous owners for things like unpaid child support or owed taxes. If potential issues are found, then the seller would be responsible for resolving those before the sale can move forward.

Title insurance is designed to protect you and your lender from exactly those kinds of surprises. [Better Settlement Services](https://better.com/title) can work hand in hand with Better Mortgage to ensure quick and transparent processing of your title insurance.

<div id="9"></div><h4>Underwriting: 10–15 days</h4>

While your title, appraisal, and inspection work is being completed, your lender will thoroughly review all the information you provided to verify that it is accurate. They’ll also calculate your [debt-to-income ratio](https://better.com/content/improving-your-debt-to-income-ratio-dti-when-applying-for-a-mortgage/) to determine the risk level of approving you for the loan. While this process usually takes around 10 to 15 days, it may take longer depending on your financial circumstances. For example, if you have multiple income sources, such as rental or interest income, or you are pulling your down payment from various asset accounts, or [through a gift letter](https://better.com/content/how-to-use-a-gift-letter-for-your-mortgage/), then it could take a little longer for an underwriter to verify all of this.

Once everything is accepted, you’ll receive a conditional approval. This means that you’ll be approved for a loan once certain conditions are met. These might include additional documentation, the sale of your current home, or results from an appraisal. When all the steps of the process are completed, you’ll receive a “clear to close” notice, meaning you’ve been fully approved and can move forward with closing—the last step before the home is yours! 

<div id="10"></div><h2>Closing disclosure: 1 day</h2>

3 days before closing, your lender must provide you a document known as a “[closing disclosure](https://better.com/content/a-guide-to-understanding-your-closing-disclosure/).” The 3-day window gives you time to compare your final terms and costs to those estimated in the loan estimate you previously received. The closing disclosure will contain the exact figures of your monthly mortgage payment, as well as how much it will cost to close on your loan. If you have any questions, this is the time to ask your lender before you go to the closing table.

<div id="11"></div><h2>Final walkthrough: 1–4 hours</h2>

Before closing, it is recommended you and your agent perform a final walkthrough. This is your chance to verify the home is in a satisfactory condition since your offer was first accepted. You should ensure all the correct appliances and fixtures are still in the home and that any negotiated repairs were completed. If there are any problems, your agent can help you get them fixed. If all looks great, then you’ll be ready to close. 

<div id="12"></div><h2>Home closing: 1 day</h2>

Congratulations! You made it to the last step of the loan process. During closing, you’ll be expected to sign paperwork. Then, your lender will transfer the funds to the home seller and initiate your loan, and you’ll (finally!) get the keys to your new home. The closing process usually takes an hour or two, but in some states, funding may happen a day or so after the closing date. After closing, you’ll officially be a homeowner. Time to celebrate!

Ready to start the process of buying a home? Visit Better Mortgage today to apply for a pre-approval. 

<br> <br>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapprovals/purchase">Learn more</a>  
 </div>
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<p class="legal">*See <a href="https://better.com/faq/rates/whats-the-fine-print-better-real-estate">Better Real Estate discount fine print</a>.</p>

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Many first-time home buyers may find themselves asking, “How long does it take to buy a home?” This Better Mortgage timeline will give you a good idea of what to expect.

Home Buying Process | Step by Step Timeline

Blog post image for Your timeline for the homebuying process

Your timeline for the homebuying process

![A comprehensive guide to a second home loan](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F5fd9119897cd43f988df2db8824d200b)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">Second homes, or vacation homes, must meet specific guidelines to be eligible for a second home loan.</p>

<p class="learnfont">Second home mortgage qualifications are typically more strict than for a primary residence.</p>

  <p class="learnfont">Beyond a mortgage, several alternative financing options can help you pay for your second home.</p>

  </div>
  <br><br>
<h2 style="margin-bottom:24px;">Table of contents</h2>
<ul>
    <li><a href="#1">What is a second home mortgage loan?</a></li>
    <li><a href="#2">Things to Consider When Taking Out a Mortgage Loan for a Second Home</a></li>
    <li><a href="#3">Second home loan mortgage requirements</a></li>
    <li><a href="#4">Alternative ways to finance a second home</a></li>
    <ol style="margin-left:24px">
        <li><a href="#5">Home equity line of credit (HELOC)</a></li>
        <li><a href="#6">Cash-out refinance</a></li>
    </ol>
    <li><a href="#7">How to Buy a Second Home With a Mortgage: The process</a></li>
    <ol style="margin-left:24px">
        <li><a href="#8">Get pre-approved for a second home mortgage loan</a></li>
        <li><a href="#9">Work with a local agent</a></li>
        <li><a href="#10">Hunt for your new home</a></li>
        <li><a href="#11">Make an offer</a></li>
        <li><a href="#12">Close on your mortgage</a></li>
    </ol>
    <li><a href="#13">Get a second home loan with Better Mortgage</a></li>
</ul>
<br>

If there’s a special place in your heart you frequently visit, then you may be ready to ditch hotel rooms and rentals and buy a more permanent place of your own. Second homes can serve a variety of purposes, from vacation spots to practical dwellings in prime locations.

Here’s how second homes differ from other property types, how second mortgages work, and what you can expect from the buying process once you’re ready to get started.

<div id="1"><br></div>

## What is a second home mortgage loan?
A second home loan is a mortgage used to finance a secondary or vacation residence. 

Second home loans differ from those used for [primary residences and investment properties](https://better.com/content/primary-residence-second-home-or-investment-property-whats-the-difference/) because each property type represents a different level of risk for lenders. For instance, because you’re not dependent on your second home as a primary place to live, lenders assume you may be more likely to stop making mortgage payments if you fall on hard times. 

For a property to be [considered a second home](https://better.com/content/buying-a-second-home/) and deemed eligible for a second home loan, it must meet the following guidelines:

- The home must be a single-unit dwelling.
- The property must be suitable for year-round occupancy, even if you only intend to use it for part of the year.
- You’re required to have exclusive use of the property, meaning no long-term leases or timeshare scenarios.
- The home may not be under the control of a property management company.
- In most cases, it must be located a certain distance from your primary residence.

You may be able to rent out a second home when you’re not using the property, but rentals are typically restricted to 180 days per year. And any projected rental income cannot be considered for mortgage qualifying purposes.

[Unlike second property mortgages, investment property mortgages’](https://better.com/content/second-home-vs-investment-property) allow for even longer rental terms (year-round), but also come with the toughest qualifying guidelines because they tend to have higher delinquency rates than other occupancy types. Lenders will typically expect that you are truly using the property as a second home and not a full investment property that allows for tenancies longer than 180 days.

<br> <br>

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 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
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<div id="2"><br></div> 

## Things to consider when financing a second home
While [purchasing a second home](https://better.com/content/buying-a-second-home/) is an exciting adventure, financing requirements can be a bit more strict than those for a primary mortgage. Second mortgages also tend to come with higher interest rates because of the increased risk they represent to lenders.

<div id="3"><br></div>

## Second home loan mortgage requirements

Here’s what your typical mortgage requirements [qualify for a second home loan](https://better.com/content/buying-a-second-home/) are:

- At least 20% of the purchase price as a down payment
- A lower debt-to-income ratio, usually less than 43%
- A good-to-excellent credit score
- Proof of enough cash reserves to cover several months’ worth of mortgage payments

<div id="4"><br></div>

## Alternative ways to finance a second home
If you think it will be a challenge to get a second mortgage based on the requirements above, or you’d prefer a different way to pay, there are other alternatives to consider. These options will allow you to leverage the equity you’ve built up in your primary residence, and use it toward your second home.

<div id="5"><br></div>

### Home equity line of credit (HELOC)
A [home equity line of credit](https://better.com/content/when-and-why-would-i-need-second-mortgage) allows you to borrow against the equity from your primary home on an as-needed basis and pay it off with interest over time. It works similarly to a credit card where you can borrow up to a specified credit limit, and the amount gets replenished as you make payments. 

Keep in mind that because HELOCs are secured by your primary residence, your lender may be able to foreclose on your home if you stop making payments.

<div id="6"><br></div>

### Cash-out refinance
A [cash-out refinance](https://better.com/content/guide-to-cash-out-refinance) is similar to a traditional refinance in that you replace your current primary mortgage with a brand new one. However, with a cash-out refi, you tap into your current home’s equity to free up extra cash for your new second home. 

Of course, this will add to your existing mortgage balance by increasing the amount you owe, which may result in a higher mortgage payment. Also, when you refinance, you typically reset the payoff clock on your mortgage, especially if you’re getting a new 30-year home loan, so going this route for a second home may take you longer to pay off your first mortgage. 

<div id="7"><br></div>

## How to buy a second home with a mortgage: The process
If you decide to move forward with a second home loan, then here are the steps you can expect from the homebuying and mortgage process. 

<div id="8"><br></div>

### Get pre-approved for a second home mortgage loan
Before you start shopping around and going to open houses, you’ll want to confirm [how much you can afford](https://better.com/how-much-home-can-i-afford) with Better Mortgage to spend. A [pre-approval](https://better.com/content/how-to-get-pre-approved-for-a-mortgage) can give you an idea of the amount you’ll be approved to borrow. 

Not all lenders offer second home financing. But luckily, Better Mortgage does! With our online process, you can get pre-approved in as little as 3 minutes, without affecting your credit score. 

<br> <br>

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 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
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<div id="9"><br></div>

### Work with a local agent
Once you’ve been pre-approved, you’re ready to connect with a [Better Real Estate Agent](https://better.com/with/find-an-agent). Because you’ll likely be buying a second home in a different area from where you currently live, it’s a good idea to interview a few local agents. They should be able to answer your questions about various neighborhoods, traffic patterns, and local events and help guide you through your search.

<div id="10"><br></div>

### Hunt for your new home
After connecting with a [Better Real Estate Agent](https://better.com/with/find-an-agent), it’s time for the fun part: shopping for homes. Think about taking a trip to the area where you want to buy and asking your agent to set up multiple showings to make the best use of your time.

<div id="11"><br></div>

### Make an offer
Once you’ve found the perfect second home, it’s time to [make an offer](https://better.com/content/how-to-make-an-offer-on-a-home). You’ll work with your agent to decide how much to offer, draw up the paperwork, and negotiate with the seller. If your offer is accepted, you’ll be ready to move on to the last step in the process.

<div id="12"><br></div>

### Close on your mortgage
[Most homes close within 1-2 months](https://www.forbes.com/advisor/mortgages/how-long-does-it-take-to-close-on-a-house/ "external") of when the seller first accepted the offer. During this time, you’ll have any requested inspections, receive an appraisal report, complete your mortgage documentation, and attend a final walk-through.

Then, you’ll be ready to head to closing where you and the seller will sign paperwork and your lender will send over the necessary funds. At the end, you’ll be handed the keys and officially be the proud owner of a second home and you can close 10 days faster than the industry average with Better Mortgage.

<div id="13"><br></div>

## Get a second home loan with Better Mortgage
Buying a second home is an exciting opportunity. But before you dive in, it helps to know exactly how much second home you can afford. 

Our pre-approval process takes as little as 3 minutes and can give you the confidence to make an offer on your second home.

<br> <br>

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 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
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Thinking of buying a vacation home? Find out the requirements the property must meet to be eligible for a second mortgage. 

A Comprehensive Guide to a Second Home Loan

Blog post image for A comprehensive guide to a second home loan

A comprehensive guide to a second home loan

![Two Semi Circles Inside Dark Green Box: One of Person On Phone Reviewing Document and One of a House](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F11dbcc29890841259334f642f25796d9)

 <br>
  <div class="learn">
<p class="learnfont"><strong>What You’ll Learn</strong></p>

<p class="learnfont">What home equity is,  how you earn it, and different options for tapping into it
</p>

<p class="learnfont">The difference between home equity loans, home equity lines of credit, and cash-out refinances</p>

  <p class="learnfont">How to determine which home equity option is right for you</p>

  </div>

<h2>Deciding between home refinance vs home equity loan? This guide will help you understand the nuances and benefits of each option, enabling you to leverage your home equity effectively.</h2>

You worked hard, saved up, and bought your dream home. You’ve been consistently paying your mortgage and now you're starting to think about new financial goals—like home renovations, [debt consolidation](https://better.com/content/cash-out-refinancing-gives-you-options/), or even putting money toward your child’s college tuition.

But if you’re diverting the majority of your cash flow to mortgage payments, it might not leave much left over to cover these other goals. Luckily, there’s a way to leverage your [home itself](https://better.com/content/cash-out-refinancing-gives-you-options/) and generate  liquid assets (aka, cash)—this can be done by tapping into your home equity. Discover the nuances of home refinance vs home equity loan options and how using equity to refinance can turn your home's value into cash.

<br>
 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get Pre-Approved</a>  
 </div>
<br>

<h2>What is home equity and how to earn it</h2>

Your home equity is the portion of your home that you own—you can calculate this by measuring the value of your home minus the amount of money you still owe on your mortgage. For example, if your home is worth $250,000 and your current loan balance is $150,000, then you have $100,000 in home equity:

![Chart with Equation and Example Figures: Estimated Home Value - Outstanding Mortgage Balance = Home Equity](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F7d403c6e828045beb7e4fd8bfd01d01a)

There are a number of ways your home equity can grow. The first and most obvious way to grow your home equity is by making your monthly mortgage payments.  Every time you make a mortgage payment and reduce the outstanding principal balance of your loan, you essentially “buy back” a portion of your home’s value from your mortgage lender.

Your equity can also increase if the [appraised value](https://better.com/content/can-messy-home-affect-appraisal/) of your home goes up. The easiest way to make this happen is through home improvements and renovations, but it can also occur naturally over time housing appreciation and housing market fluctuations. Whatever the reason, when the value of your home increases, the difference between that value and your mortgage loan balance also gets bigger, and the difference is your earned home equity.

<h2>So, how do you turn home equity into cash?</h2> 

There are 3 main ways you can access your home’s equity: Taking out a home equity loan (HEL), opening a home equity line of credit (HELOC), or doing a cash-out refinance. Here’s what you need to know about each scenario, and how to decide which one is the best fit for your financial situation.

<h2>Tapping into your home equity with a HEL or HELOC</h2>

Home equity loans and home equity lines of credit are both [second mortgages](https://better.com/content/when-and-why-would-i-need-second-mortgage/) that use the equity in your home as collateral. However, there are some key differences between them:

<h4>Loan terms</h4>

A home equity loan is a second mortgage with a separate term and repayment schedule from your existing mortgage. HELs typically offer repayment terms of 15 or 20 years. You can repay the balance early without penalty and once you finish paying it off, the loan is closed.

A home equity line of credit is a second mortgage with a separate term and repayment schedule from your existing first mortgage, but unlike HELs, HELOCs allow you to draw cash as needed rather than in one lump sum. These cash draws are available for the first 10 years of the loan, which is called the “draw period.” After that, there is a 20-year repayment period when the credit line is no longer available and you’ll pay back the balance of the loan. You can also choose to repay any portion of the balance at any time without penalty and still access the credit line within the draw period.

<h4>Interest rates and closing costs</h4>

The interest rate you lock in for your home equity loan is fixed—meaning you can’t renegotiate down the line. HEL rates are typically higher than 30-year fixed-rate mortgage rates, but closing costs for these loans are substantially lower because there are  fewer operational and processing costs and the loan amounts are smaller.

Home equity line of credit interest rates can fluctuate according to changes in the U.S. Prime Rate throughout the life of the loan. However, you’ll likely pay very little or even nothing in closing costs. Even with the fluctuating interest rate,  it may still be more cost-effective to use a HELOC for major purchases than charging them to a credit card. Check HELOC terms carefully, as some lenders offer the option to convert to a fixed-rate during the repayment period.

<h4>Receiving and using funds</h4>

When you get a home equity loan, you’ll receive the loan disbursement in full as one lump sum, which is wired to a bank account of your choice. From there, you have the freedom to spend or save the money  in any way you choose in whatever time frame you decide.

 A home equity line of credit works differently. A line of credit lets you withdraw funds at any time and for any purpose during the 10-year draw period. You may receive a checkbook or a debit card that gives you access to the credit line. There are no restrictions on how or when you use the money once it’s drawn.

<h2>Using equity to refinance: What you need to know</h2>

Using equity to refinance can be a strategic move for homeowners looking to consolidate debt If you’d rather not take out a second loan on your home, you can access your home equity with a cash-out refinance. Here’s how it works:

<h4>Loan terms </h4>

With a cash-out refinance, you essentially take out a new mortgage greater than the balance of your existing loan, but less than your home’s market value. This allows you to pay off the remaining balance of your existing mortgage and “cash out” your additional home equity. The new loan will result in a new interest rate and loan term, along with a new repayment schedule—typically somewhere between 15 and 30 years depending on the loan you choose. Keep in mind that acash-out refinance may be subject to, prepayment penalties; while it’s not common, it depends on the lender and loan so make sure you factor that into the cost of your refi if applicable.

<h4>Interest rates and closing costs</h4>

Cash-out refinance loans may offer [fixed or variable interest rates](https://better.com/content/what-is-an-arm/). While closing costs are higher than both the HEL and HELOC options, it might be cheaper overall to leverage your equity through a cash-out refinance. Making payments on a single loan may be substantially more manageable than making payments on your original mortgage plus the second mortgage (HEL or HELOC) combined. To compare the costs of both options, calculate how long it will take you to break even on your cash-out refinance. Also look at the monthly payment amounts to make sure you have the budget capacity to manage the extra debt. 

<br>
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 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get Pre-Approved</a>  
 </div>
<br>

<h4>Receiving and using funds</h4>

Similar to a home equity loan, a cash-out refinance offers you a lump sum at closing. Your new loan pays off your existing first mortgage and then disburses the difference in the remaining funds (the “cash-out”) as a check or into a bank account of your choosing. You may spend or save loan proceeds in any way you choose in whatever time frame you decide.

<h2>Understanding how much you can borrow</h2>

Lenders will usually allow you to borrow up to 80% of your equity with a cash-out refinance and between 80 to 90% of your equity with a HEL or HELOC. 

![Step 1 and Step 2 on How to Calculate Maximum Amount of Equity That Could Be Borrowed, and Total Amount You Can Borrow](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F2407bf4a56f949799edb8038d4cb8c91)

So, using the same numbers from the original example, if your home is worth $250,000 and you have an outstanding mortgage balance of $150,000, then you could end up with around $62,500 if you took the maximum loan amount (85% of total equity in this example):

![$250,000 x .85 = $212,500 and $212,500 - 150,000 = $62,500](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F909a96211cd44383b1e819cd4cb75516)

This is a basic example for illustration purposes. Your final amount may be less due to closing costs or any other expenses associated with each loan.

<h2>Cash out refinance vs HELOC vs refinance</h2>

Although each of these 3 options allow you to tap into the equity of your home, their features and terms vary. Here is a [heloc vs cash out refinancing calculator](https://better.com/heloc-vs-cashout-refi-calculator) that can help with your decision making. 

![Chart with Green Checks Showing the Benefits that Come with a Home Equity Loan, HELOC, and Cash-Out Refinance](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2F6bafc65d4ba44db0825e136a70ca2bbc)

The best loan for you will depend on your needs and your financial circumstances, but there are certainly pros and cons to each option. Take a look at the following breakdown of advantages and disadvantages to see how they might impact your decision:

<h4>Pros and cons: Home equity loan</h4>

<strong>Pros:</strong> 

- Fixed interest rate and predictable payments
- Closing costs may be lower than a cash-out refinance of your first mortgage

<strong>Cons:</strong>

- Loan is closed once paid, no reusable credit line 
- Typically comes with higher rates than a cash-out refinance and higher closing costs than a HELOC 
- Additional payment on top of your monthly mortgage, and adds a lien to your property behind your first mortgage lien

<h4>Pros and cons: Home equity line of credit</h4>

<strong>Pros:</strong>

- Flexibility to use available credit as needed, and only pay interest on the money you use 
- May offer interest-only payments during the draw period

<strong>Cons:</strong>

- Variable interest rates could mean costs go up over time
- Easy access to cash may tempt you to overspend, if you’re not disciplined
- Creates an additional payment on top of your monthly mortgage, and adds a lien

<h4>Pros and cons: Cash-out refinance</h4>

<strong>Pros:</strong>

- Usually the lowest interest rates compared to HELs or HELOCs 
- If you plan to stay in your home for a while, may be more cost-effective over time depending on the break-even point
- You will only have to make one mortgage payment
- Pays off and replaces existing first mortgage; assumes place as a new single lien 

<strong>Cons:</strong>

- Closing costs may be a bit higher
- Lenders may not allow you to take as much cash against your equity (~80% vs. 85-90% with a HEL or HELOC)

<h2>Which home equity option is right for you?</h2>

Among HELs or HELOCs and cash-out refinances, you may find that one option serves you better than the others. Here are a few scenarios to consider:

<h4>When you know exactly how much money you need, and it’s a small amount:</h4> 

If you don’t need all your available home equity, or if you’d be tempted to overspend by a HELOC’s open access to funds, then a cash-out refinance or home equity loan (HEL) might be best. Comparing the costs, payment structure, and different [break-even points](https://better.com/content/refinance-calculator/) between the two loans will tell you which is the smarter move.

<h4>When your plans are uncertain, and you want flexibility:</h4> 

If you don’t know the specific dollar amount you will need or prefer to have access to cash as you need it, then a HELOC may work best for you. While rates are variable, they are substantially lower than credit cards, and may be convertible to a fixed rate during the repayment period, depending upon the lender. 

<h4>When you need a large sum and plan to stay in your home for a while:</h4>

In this scenario, a cash-out refinance could be the best option. If you can snag a significantly lower interest rate, you might be able to offset the  higher closing costs over the long term. Not only that, but by consolidating your original mortgage and your home equity withdrawal, you’ll only have to worry about a single mortgage payment each month.

A cash-out refinance can be especially beneficial if mortgage rates have dropped since you took out your original mortgage or [refinanced previously](https://better.com/content/how-often-can-you-refinance-your-home/). This can lower your cost of borrowing and allow you to access cash from your home equity at the same time. Win-win! Enter your details, a new interest rate, and loan type in Better Mortgage's [cash-out refinance calculator](https://better.com/content/cash-out-refinance-calculator) to see how much you can cash out.

Want to get your personalized refinance rates and start planning your financial future? Check your rates today.

#### More questions? Related FAQs

- [What type of refinance loans does Better Mortgage offer?](https://better.com/faq/refinancing-your-mortgage/what-type-of-refinance-loans-does-better-mortgage-offer/) 
- [How will I get my cash out funds?](https://better.com/faq/title-and-settlement-services/how-will-i-get-my-cash-out-funds/) 
- [Is a cash-out refinance right for you?](https://better.com/content/is-a-cash-out-refinance-right-for-you/) 
- [What closing costs can I expect when I refinance?](https://better.com/faq/refinancing-your-mortgage/what-closing-costs-can-i-expect-when-i-refinance/)

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  line-height: 10px !important;
      padding-left: 15px;
  }
.footnote{
  font-size:14px !important;
  color: #767676;
  text-align:center;
  }
.charttitle{
    font-size:24px !important;
  text-align:center;
  }

  p.chartsmall {
    font-size:12px!important;
  }

    #img1 {display:block;}
#img2 {display:none}

  @media all and (max-width: 600px) {

      .mobilehide{ display: none;
  }
    #img1 {display: none;}
    #img2 {display: block;}

    p.chartsmall {
    font-size:9px!important;
  }

  .headshot{
  width:150px;

  }

}
  .equation{
    padding-top:40px;
    padding-bottom:50px;
    padding-left:30px;
    padding-right:30px;
  text-align:center !important;
    background:#291842;
  }

  p.equationtop{
font-weight:300!important;  
    color:#ffffff;
  }
  p.equationbottom{
    font-weight:700!important;   
   font-size:28px;
    color:#ffffff;
  }
  .headshot{
    padding-bottom:15px;
  width:150px;

  }
  .centerqa{
  text-align:center!important;
  }

  </style>

Want to access the equity in your home? You have 2 options: taking out a second mortgage or doing a cash-out refinance. Let’s compare the benefits of both.

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