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[![ Side by Side Image: Left Image is Bold Text That Reads: Don't Fall for Bait & Switch. Right is of Yellow Front Door on the Right](https://cdn.builder.io/api/v1/image/assets%2Fea37b90b89334a2ab1714e2159c75418%2Fdf53051e49a24c64bfe8cb1724af0e8d)](https://better.com/mortgage-rates/refinance)

<p>If you’re looking to <a href="https://better.com/content/6-reasons-to-refinance-your-mortgage/">refinance your mortgage</a>, you’ve probably checked online rate tables <a href="https://better.com/mortgage-rates/refinance">comparing rates</a> from different lenders.  But often, the rates at the top of the tables may not be an accurate representation of what you’ll actually get–or how competitive those lenders’ pricing actually is.</p>

<p><br></p>

<div style="text-align: center">  
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<p><br></p>

<h2 id="baitandswitchinthemortgageworld">Bait-and-switch in the mortgage world</h2>

<p>Most refinance borrowers want a <a href="https://better.com/content/no-cost-mortgage/">“no-cost” loan</a>, which means they don’t have to pay anything out of pocket when they refinance. No-cost loans involve getting lender credits, which offset the closing costs associated with refinancing in exchange for a slightly higher rate.</p>

<p>Even though most borrowers choose a no-cost loan with lender credits, most rate tables display rates <em>without</em> credits. That means that some lenders are advertising low rates for the loans that most people don’t even want, making them seem more competitive than they actually are. So the no-cost loan you wanted could come with a higher rate than you had expected.</p>

<p>There’s also another “bait-and-switch” tactic at play here. Lenders will often decide to take a very small profit margin on the low, advertised rate that shows up on rate tables. Then, they increase their profit margin significantly on the other rates they offer, knowing that the majority of borrowers will not end up picking their lowest advertised rate. They are giving the illusion of being competitive, when really only <em>one</em> of their rates is competitive – and it’s not the rate most borrowers choose. </p>

<p><br></p>

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<p><br></p>

<h2 id="howtobeabetterrefinanceshopper">How to be a Better Mortgage refinance shopper</h2>

<p>Here are some quick tips to avoid falling prey to a bait-and-switch scheme:</p>

<ul>
<li>Get an official <a href="https://better.com/content/a-quick-guide-to-your-loan-estimate/">Loan Estimate</a> (LE) from a lender as soon as you can. An LE is a standard document detailing all the costs associated with your mortgage. Watch out for lenders who require an “initial review” or “underwriting approval” of your documents before giving you an LE. They are trying to get you committed to working with them before giving you pricing details.</li>
<li>Know that moving up .125 in rate should decrease your closing costs or points by .50%-.75% of the loan amount on a fixed-rate mortgage. Any less than that and there’s a good chance that advertised rate was just bait. </li>
<li>If a lender won’t honor their advertised rate because of their delay, move on. Speed and service pre-lock are indicative of speed and service post-lock.</li>
</ul>

<p>On the other hand, there are a few factors that can actually lead to higher rates than what's on rate tables:</p>

<ul>
<li>A cash-out refinance</li>
<li>A debt consolidation refinance (which is a type of cash-out refinance)</li>
<li>An investment property refinance </li>
<li>A condo refinance (in some cases)</li>
<li>Having a second mortgage lien on the property (such as a HELOC)</li>
</ul>

<p><br></p>

<div style="text-align: center">  
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<h2 id="itstimeforabetterrefinanceexperience">It’s time for a Better refinance experience.</h2>

<p>At Better Mortgage, we <strong>never</strong> bait-and-switch. Our profits are the same no matter which rate you choose, which means that we’ll never try to sell you a loan that’s bad for your bottom line and good for ours.</p>


Don’t take the bait. Here’s a guide to being a better rate shopper and a primer on rates, credits, and “no closing cost” loans.

Be a Better Refinance Shopper

Blog post image for Don't take the bait! Here's the reality of refi rates

Don't take the bait! Here's the reality of refi rates

<h2 id="builtforspeeddesignedtoputyouincontrol"><em>Built for speed, designed to put you in control</em></h2>

<p><em>We’ve created a straightforward online mortgage experience, so getting financing for a home is faster, more affordable, and completely transparent.</em></p>

<hr />

[![ Close Up of Red Home Against Light Blue Sky with Text That Reads: Step 1: Get Verified](https://media.better.com/content/prod/2017/06/Step1@1x.png.png)](https://better.com/preapprovals/purchase)

<h3 id="goingshoppinggetaverifiedpreapprovalletter">Going shopping? Get a Verified Pre-Approval Letter.</h3>

<p>We’ll determine exactly how much you can afford to borrow, so you can go house hunting with confidence. With our smart technology and a team of underwriters, we’ve made pre-approval faster than ever. It’s 100% online and completely free.</p>

<ol>
<li><p>Fill out our easy-to-understand <a href="https://better.com/preapprovals/purchase">online application</a>. We’ll start with a 3-minute basic pre-approval to give you quick a sense of what you can afford.</p></li>
<li><p>Next, qualified borrowers can upgrade to <a href="https://better.com/content/vpal/">Verified Pre-Approval</a> by linking your bank accounts and uploading documents (like tax returns and W2s). This allows us to verify your income, assets, debt, and credit. Pause and come back at any time.</p></li>
<li><p>We’ll provide a Verified Pre-Approval Letter detailing how much you are likely to secure funding for.<sup id="fnref:1"><a href="#fn:1" rel="footnote">1</a></sup> You can request a modification of your letter online anytime without any phone calls. Just because you can borrow a certain amount doesn’t mean you’ll want to offer that maximum amount to the seller.</p></li>
</ol>

[![ Green Quotation Mark](https://media.better.com/content/prod/2018/03/Grass_Quote.png)](https://better.com/preapprovals/purchase)

<h3 align="center">The verified pre-approval process was very quick, which enabled me to put in an offer the same day I started the pre-approval process. Another offer came in right after mine, so I would have lost the house if the process took longer.</h3>  

<p><p align="center">- Erika, Home purchase in CT<p></p>

<p><a href="https://better.com/content/so-youre-wondering-how-much-house-can-you-actually-afford/">What’s the benefit of a Verified Pre-Approval?</a> The more detailed, verifiable information you can give up front, the less chance that there will be surprises down the line when you apply for your loan. And when you’re competing with other homebuyers for your dream home, the certainty that you can afford it matters.</p>

<p>Questions along the way? <a href="https://better.com/schedule-call?loanType=purchase&amp;TRACKINGLOCATION=htgabm&amp;TRACKINGBRANDING=purchase">Chat with one of our friendly, non-commissioned Mortgage Experts.</a></p>


[![Home Covered in Green Vines with Text that Reads Step 2 Lock Your Rate](https://media.better.com/content/prod/2017/06/Step2@1x.png.png)](https://better.com/preapprovals/purchase)

<h3 id="foundyourdreamhomelockthebestrateperiod">Found your dream home? Lock the best rate, period.</h3>

<p>Because we’ve developed relationships with a variety of reputable investors and streamlined clunky processes, we can pass the savings on to you. We’re confident we can get you the best rate. </p>

<ol>
<li><p>Get a transparent <a href="https://better.com/mortgage-rates/purchase">rate quote</a> in seconds. Every quote will provide a monthly payment amount and options for paying points or taking credits (including a <a href="https://better.com/content/no-cost-mortgage/">no-cost option</a>).</p></li>
<li><p>Ready to lock? Lock your rate with us online, 24/7.<sup id="fnref:4"><a href="#fn:4" rel="footnote">4</a></sup></p></li>
</ol>


<p>Trying to do the math? Use our interactive tools to run the numbers on <a href="https://better.com/content/amortization-schedule/">taking credits or paying points</a> or to see your <a href="https://better.com/content/amortization-schedule/">amortization schedule</a>.</p>

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[![ Close Up of Side Panel of Blue Home Behind Green Shrubs with Text that Reads: Step 3: Close Your Loan](https://media.better.com/content/prod/2017/06/Step3@1x.png.png)](https://better.com/preapprovals/purchase)

<h3 id="ratelockedwellfundyourloaninaslittleas21dayssupidfnref2ahreffn2relfootnote2asup"> Rate locked? We’ll fund your loan in as little as 21 days <sup id="fnref:2"><a href="#fn:2" rel="footnote"> 2 </a></sup></h3>

<p>We’ve taken the stress out of closing with a lightning fast, in-house underwriting process, helpful Processing Expert, and no added fees.</p>

<ol>
<li><p><strong>Lock and go:</strong> Once you have the purchase contract for your new home, you’re ready to <a href="https://better.com/content/why-locking-your-mortgage-rate-wont-box-you-in/">lock your rate</a>. That means we will honor the rates that are available to you on that day, even if they go up during your mortgage process. <br />
<br>(After you lock the rates for a particular day, you’ll still be able to change your loan type, change your points or credits options, add a co-borrower, or take advantage of market rates falling by .25%)</p></li>
<li><p><strong>Documents:</strong> Next, we’ll have you upload your <a href="https://better.com/content/what-documents-will-i-need-for-my-mortgage/">financial documents</a> (things like pay stubs, bank statements, and tax returns). We’ll also need a home insurance quote. <br />
<br> The great news is if you’ve already gotten a Verified Pre-Approval Letter with us, we already have most of the information we need.</p></li>
<li><p><strong>Follow-ups and property-related tasks:</strong> You’ll be assigned a Processing Expert, who will work with you to answer questions and make sure we have all the documents we need. You can also log in at any time to see what information we still need from you. In the meantime, we’ll start working on property-related tasks like your title, appraisal, and HOA questionnaire (if applicable).</p></li>
<li><p><strong>Underwriting your loan:</strong> Once we have what we need from you, our underwriting team works to review everything. During this time, your Processing Expert may follow up with you about any additional information needed. They’ll also be working to make sure all property-related tasks are completed. When everything is nearly finalized, we’ll ask you to pay for home insurance and confirm with us.</p></li>
<li><p><strong>Final approval:</strong> Once all the final documentation is in, we perform some final checks to make sure absolutely everything is in order.</p></li>
<li><p><strong>Closing and funding:</strong> Once your loan is finalized, we’ll send over the closing disclosures for you to review (which includes the final third-party costs, down payment, and prepaid costs). We’ll work with you to schedule the closing and get all the necessary documents signed. </p></li>
</ol>

<p>Wondering about the closing costs and third party fees you’ll need to pay? <a href="https://better.com/faq/home-purchase-loan-costs/how-much-will-it-cost-me-to-buy-a-home">Here’s a list</a>.</p>

[![Lock Down a Lower Rate with Green "Start" Button](https://media.better.com/content/prod/2017/06/blog_GetBetterMortgage_CTA_DreamhomeG.png)](https://better.com/preapprovals/purchase)

<div class="footnotes"><ol><li class="footnote" id="fn:1"><p>Our Verified Pre-Approval Letter tells you how much you are likely to secure financing for, barring unforeseen circumstances, such as issues with the appraisal or unique financial situations. Because this amount is based on actual documents, not just stated information, the amount shown in your letter may be less than the amount you initially asked for. <a href="#fnref:1" title="return to article">↩</a></p></li>


<li class="footnote" id="fn:4"><p>Better Mortgage will honor all pricing shown at lock requests made both during and after business hours, provided user-entered information is accurate. The accuracy of user-entered information will be determined during business hours. To date, we have honored 100% of the overnight rate lock requests. <a href="#fnref:4" title="return to article">↩</a></p></li></ol></div>

What's the best way to get a mortgage? At Better Mortgage, we’ve created an online mortgage experience, so getting financing for a home is completely transparent.

How to get a better mortgage

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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

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<p>Have you ever wondered why buying or refinancing a home is so outdated and complex? You’re not alone. Millions of people go through the mortgage process each year. It is a cornerstone of our economy. Families everywhere build their lives around this asset. For almost everyone, their home represents the biggest financial transaction of their lives.</p>

<h4 id="andyetthemortgageindustryissofarbehind">And yet the mortgage industry is so far behind.</h4>

<ul>
<li>It’s behind on technology. The best-in-class origination software was written in the ‘90s.</li>
<li>It’s needlessly unclear. Got that PUD / Condo Cert request? How about your VVOE or WVOE?</li>
<li>Worst of all, it’s not very user-friendly. Why does it take so many phone calls just to get pre-approved?</li>
</ul>

<p>Everywhere we look we see legacy infrastructure, needless middlemen, and frustrating pain points. It’s clear that the process doesn’t work for the busy, modern-day, mobile consumer.</p>

<p>Some lenders pretend as if the internet doesn’t even exist.</p>

<p>We launched Better Mortgage with the goal of building a fundamentally different mortgage company; one that is simple, transparent, and completely online. Consumers are clamoring for a simpler mortgage experience. We believe better technology is the way.</p>

<h4 id="atbettermortgagewerebringingmortgagesintothe21stcentury">At Better Mortgage, we’re bringing mortgages into the 21st century.</h4>

<p>First we assembled a world-class engineering team. Our team hails from places like Google, Microsoft, and Spotify. Then we acquired an existing mortgage bank and rebuilt it from the ground up, rewriting traditional assumptions at every step.</p>

<p>Since we are a technology company at heart, our team is constantly improving the process as we learn from our customers.</p>

<p>Today we’re proud to offer a fully re-engineered mortgage experience that puts users first. In 2016, no one should have to play phone tag. No one should have to fax a document. And no one should have to pay thousands of dollars in commission to a loan officer who mostly slows the process down. <br />
<br>  </p>

<h4 id="sowhatdoesthatmeanforyoubr">So what does that mean for you?<br></h4>

<p><br>  </p>

<h3 id="0commission">0% commission</h3>

<p>Communicate on your terms. Work with our non-commissioned Mortgage Experts by chat, phone, email, or even text — we won’t call you unless you need us to (unless it’s really urgent). At Better Mortgage, you work with support, not sales.</p>

<h3 id="100online">100% online</h3>

<p>Complete the entire process online — make progress 24/7. Nothing should slow you down. </p>

<p>Be efficient and paper-free. Save time by e-signing documents, linking bank accounts, and securely uploading files.  </p>

<h4 id="3minutepreapproval">3-minute pre-approval</h4>

<p>What used to take weeks now takes minutes. With Better Mortgage, applying for a pre-approval for a refinance or new mortgage only takes 3 minutes. And it won’t affect your credit score.</p>

[![ A Better Mortgage is a Modern Mortgage. Get Pre Approved Now](https://media.better.com/content/prod/2017/05/blog_whatisBmortg_CTA@2x.png)](https://better.com/start)

We launched Better Mortgage because the mortgage industry is broken. That's why we're making homebuying smarter, faster, and better from beginning to end. 

What is Better Mortgage?

Blog post image for What is Better Mortgage?

![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>

  </div>
  <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> 

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=second-home-vs-investment-property">Get started with Better Mortgage</a>  
 </div>

 ## 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> 

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/preapproval/nxt-purchase?utm_source=website&utm_medium=webpage&utm_campaign=blog&utm_content=second-home-vs-investment-property">Get started with Better Mortgage</a>  
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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?

![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>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

<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>

 <div style="text-align: center">  
 <a class="bet-Button bet-Button--xl bet-Button--primary" href="https://better.com/start">Get started with Better Mortgage</a>  
 </div>

<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>

 <div style="text-align: center">  
 <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>
 <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>

<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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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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