Schedule E and Financing

[Account Closed]

Hello,

I have recently started shopping for lenders to have a cash out refinance for a second home in the Catskills.

The home was bought roughly 10 years ago for $125k, we did about $60k worth of renovations and its current valuation is at least $250k.

A family member with declining mental health owns the mortgage with $89k left to pay off at 5% and we would like to restructure so there are no financial ties left.

Due to a spring fed water source, we have limited lender options.

I spoke with a recommended local lender who claims due to us renting the home on AirBnB (we have a filed Schedule E for income on this property) it would only qualify for a commercial loan, subjecting us to a higher rate (5 - 5.75%) with variable rates after a set timeframe.

Are we stuck with strictly commercial financing on this property? 

We have a paid off primary home but would prefer to leverage this one if possible to recoup investment funds.

Thanks!