The Difference Between Primary, Secondary, and Investment Mortgages
When you’re in the market for a home, understanding the various types of mortgages available to you is essential. Whether you're purchasing your first home, a vacation property, or a rental investment, knowing the distinctions between primary, secondary, and investment mortgages can help you make an informed decision. In this blog post, we’ll break down the differences between these mortgage types, especially for those looking to buy a second home or rental property.
What Is a Primary Mortgage?
A primary mortgage is the loan you take out to purchase your primary residence—the home where you live most of the time. This is the most common type of mortgage and the one that most people use when buying their first home.
Key Features of a Primary Mortgage:
Lower Interest Rates: Since the primary residence is seen as a lower risk by lenders (because it's your main home), these mortgages generally offer the lowest interest rates compared to secondary or investment property mortgages.
Lower Down Payments: Typically, primary mortgages require a smaller down payment—often as low as 3% for some types of loans (such as FHA loans for first-time homebuyers) or 5%–20% for conventional loans.
Favorable Terms: Primary mortgages often come with longer repayment terms, usually 15 to 30 years, and more lenient credit score and debt-to-income ratio requirements than secondary or investment mortgages.
Who Needs a Primary Mortgage?
Anyone buying their first home or primary residence needs a primary mortgage. It’s also the type of mortgage used if you’re refinancing your current home to secure better loan terms.
What Is a Secondary Mortgage?
A secondary mortgage, also known as a second home mortgage, is for buyers who wish to purchase a property that isn’t their primary residence but is used for personal purposes—typically a vacation home or a second home. It’s important to note that a secondary mortgage is not for investment or rental properties, even if you plan to rent out the home occasionally.
Key Features of a Secondary Mortgage:
Higher Interest Rates: Since the lender views a second home as a higher risk (because it’s not your primary residence), the interest rate on a secondary mortgage is generally higher than that of a primary mortgage, but it’s typically lower than that of an investment property loan.
Higher Down Payments: Typically, a down payment of 10%–20% is required for a second home. This is higher than the down payment requirements for a primary residence but lower than the down payment needed for an investment property.
Occupancy Requirement: Lenders require that the home be used for personal purposes and that it remains unoccupied by renters or tenants for a significant portion of the year. This means a vacation home where you or your family plan to stay periodically, but not a property you plan to rent out on a regular basis.
Who Needs a Secondary Mortgage?
A secondary mortgage is ideal for those looking to buy a vacation home or a weekend getaway property. It’s also the mortgage used by those purchasing a home in a different location where they’ll be spending part of the year, but it’s not an income-generating investment property.
What Is an Investment Mortgage?
An investment mortgage is a loan for properties that are purchased with the intent of generating rental income or capital appreciation. These properties may be single-family homes, multi-unit buildings, condos, or commercial properties that are bought to generate cash flow. Investment mortgages are typically used by real estate investors or those looking to build wealth through property ownership.
Key Features of an Investment Mortgage:
Higher Interest Rates: Investment property mortgages tend to have the highest interest rates because lenders consider these loans to be a higher risk. Since you’re not living in the property and it’s intended to generate income, the lender wants to account for potential vacancy or other financial risks.
Larger Down Payments: Typically, you’ll need a down payment of 15%–25% for investment properties. The higher down payment compensates the lender for the greater perceived risk of non-owner-occupied properties.
Stricter Qualification Requirements: Lenders often require a higher credit score (usually at least 700) and a lower debt-to-income ratio for investment property loans. They may also ask for a larger financial reserve, since they want to ensure you can handle the costs of owning and managing the property if rental income falls short.
No Occupancy Requirement: Unlike secondary homes, investment properties can be rented out full-time or part-time, as the goal is to generate income from the property.
Who Needs an Investment Mortgage?
Anyone looking to purchase rental properties—whether single-family homes, multi-family buildings, or vacation rental properties—will need an investment mortgage. These loans are used by individuals or businesses who want to make money through property rentals, long-term leases, or short-term vacation rentals (like those listed on Airbnb).
Key Differences Between Primary, Secondary, and Investment Mortgages
FeaturePrimary MortgageSecondary MortgageInvestment MortgagePurposePurchase of a primary residencePurchase of a second home or vacation propertyPurchase of rental properties or real estate investmentsDown PaymentTypically 3%–20%Usually 10%–20%Generally 15%–25%Interest RatesThe lowest rates availableHigher than primary mortgages, but lower than investmentThe highest rates of the three typesCredit Score RequirementTypically 620–700+Typically 620–700+Typically 700+Occupancy RequirementMust be the borrower’s primary residenceMust be used for personal purposes (not rented)No occupancy requirement (can be rented full-time or part-time)Risk to LenderLower riskModerate riskHigher risk
Which Mortgage Is Right for You?
Choosing between a primary, secondary, or investment mortgage depends largely on your specific needs and financial goals. Here’s a quick breakdown of when each type of mortgage is appropriate:
Primary Mortgage: If you’re purchasing your first home or a new place to live full-time, this is the mortgage for you.
Secondary Mortgage: If you’re buying a second home or vacation property that you plan to use for personal enjoyment and not for rental income, a secondary mortgage is the way to go.
Investment Mortgage: If you’re purchasing property to rent out or use as a source of income (whether long-term rentals or short-term vacation rentals), you’ll need an investment mortgage.
Conclusion
Understanding the differences between primary, secondary, and investment mortgages is essential when navigating the home-buying process. Whether you’re buying your first home, purchasing a vacation getaway, or investing in rental properties, each type of mortgage comes with its own set of requirements, interest rates, and terms. Be sure to assess your needs, financial situation, and long-term goals before choosing the mortgage that best suits your homeownership plans.
If you're ready to explore your mortgage options, speak with a mortgage professional who can help you understand the right type of loan for your property purchase and guide you through the application process.