Sep 27 2022

Primary vs. secondary vs. rental property

A quick guide to understanding the basic types of property for homebuyers.

You can take out a home loan for one of three property types: a primary home, a second residence, or an investment (rental) property. While most mortgages are used for primary residences, it’s worth familiarizing yourself with these occupancy types if you plan to invest in another home in the future.

Before you buy: Get to know the different property types

The type of property you purchase can influence the interest rate you qualify for—impacting how much you pay for your mortgage. Property type can also affect other eligibility requirements, like the LTV (loan-to-value) ratio, cash reserves, and credit score needed to borrow.

That’s because each property type carries its own risk and has some distinct differences:

1. Primary residence

As the name suggests, a primary or principal residence is the main home you’ll be living in:

  • This may include a single-family home, a townhouse/condo, a two- to four-unit property (as long as you occupy one unit), and even a floating house.
  • It must be located a reasonable distance from where you work (if not working remotely), and you’ll need to agree to live in the property within 60 days of closing.
  • It can’t be converted into an investment property within 12 months of owning the house.
  • Interest rates are typically lower compared to a secondary or rental home, and a mortgage may be easier to qualify for.

Risk for a primary residence is considered lower since homeowners need to make payments to keep their house. Along with a lower rate, a mortgage for a primary residence might also have a smaller down payment. It could be as low as zero to 3.5-percent minimum down, depending on the mortgage program you qualify for. Conventional, VA, USDA, and FHA Loans are all used for primary mortgages.

Because a loan for a primary residence has attractive terms, it can be tempting to claim a secondary home or rental property as an owner-occupied house. However, this constitutes occupancy fraud and is subject to stiff penalties.

2. Secondary residence

Also called a vacation or second home, a secondary property is only occupied for part of the year:

  • This house can’t be subject to a rental, timeshare, or property management agreement.
  • It must be a one-unit property, typically located more than 50 miles away from your primary home.
  • Options are plentiful: A beach house, lake cabin, city loft, and ski-town condo are some examples of vacation homes.
  • Interest rates and fees may be higher than on a primary home, and a mortgage may not be as easy to qualify for.

A secondary home functions as an additional house alongside your primary dwelling. Of course, it doesn’t literally have to be a second home; it could be a third or fourth. Second properties can carry more default risk—which is why interest rates may be higher—because a homeowner isn’t dependent on the home as their primary residence.

How much higher? A mortgage rate on a second home loan may be roughly a quarter of a percentage point more than the interest rate on a loan for a primary home. While a quarter point isn’t too costly, it can increase the monthly payment on a second mortgage. A second home may also require a slightly larger down payment, usually starting at around 10 percent.

Academy Mortgage offers numerous loan options for financing a second home, from refinancing your existing home to extracting cash to purchase one. Contact a local Loan Officer for details.

3. Investment property

An investment property is one you purchase for the sole purpose of renting out and generating income:

  • This may include a house, a townhouse/condo, a single/multi-unit home, and even a commercial/residential hybrid property.
  • Risk is considered greatest, so mortgage rates may be notably higher.
  • A large down payment, as well as more stringent qualifications, may also be required.
  • A home may be looked at as an investment property if it’s within 50 miles of your primary residence and/or if you plan to flip and resell it for profit.

When you buy an investment property, you become a landlord. This carries risk, triggering a lower LTV—increasing your minimum down payment—and a higher interest rate. You may also have fewer home loans to choose from; an investment property isn’t eligible for no and low down payment mortgages like USDA and FHA. Your Loan Officer can let you know your most affordable investment loan options.

As for the interest rate: The rate on an investment property may be a half to a full percentage point higher than the rate for a primary home. This will also increase the cost of a monthly mortgage. But you can deduct this interest as part of your rental property expenses; you can also keep your rate competitive by making a larger down payment (20 percent or more) and maintaining healthy credit.

Which property type is right for you?

Maybe you’re ready to buy your first house. Or maybe you have questions about purchasing a vacation home or investing in a rental property. Start with a personalized assessment: Consult with one of our local mortgage experts so they can get to know you, learn more about what you’re looking for, and provide you with your best option.

This is for informational and educational purposes only and not intended as an advertisement as defined by Regulation Z. Please consult a trusted professional as personal circumstances may vary. No specific results are guaranteed. MAC823-1482556.