Are you in the middle of the process of buying a new home?
It takes a lot! Keeping multiple things in mind, comparing options, and the pressure to identify and choose the best possible option makes the process quite overwhelming.
In this article, we will discuss the difference between purchase and refinance mortgages so that you can determine if you want to go for them and eliminate worrying about them from your list. It will help you to make informed decisions about your home financing needs and to achieve your financial goals.
A purchase mortgage is a kind of mortgage loan used to buy a new home, and the home serves as collateral for the loan.
There are different types of purchase mortgages available, such as conventional mortgages, FHA mortgages, fixed-rate mortgages, etc. Each has different terms and features, and borrowers need to know about them before going for them.
A refinance mortgage is a loan used to replace an existing mortgage with a new one. The borrower takes out the new loan to pay off the existing one, and the home continues to serve as collateral for the new loan.
You can’t get a refinance without a purchase mortgage, and this option is usually taken by people who want to modify their existing mortgage.
The most common types of refinance mortgages are cash-out, rate, and term refinance. If you are considering it, you should consult an expert to understand if refinance mortgage is right for you.
Purchase mortgages are used to buy a new home. Refinance mortgages are used to replace an existing mortgage with a new one.
Purchase mortgages are taken for the full amount required to buy a new home. Refinance mortgages are for the outstanding balance of the existing mortgage. Refinancing is basically transferring your outstanding loan balances to a new lender.
Interest rates for purchase mortgages are typically higher than those for refinance mortgages. It is why people go for refinancing for lower interest. The main reason for purchasing mortgages having higher interest rates is that lenders view people purchasing a new home as a higher risk than those who are refinancing an existing one.
Purchase mortgages come with multiple fees, such as origination fees, appraisal fees, etc. It significantly increases the overall cost of the loan. These fees are usually lower for refinancing mortgages as the lender is replacing an existing mortgage rather than issuing a new one.
Purchase mortgages usually require about 20% of the home’s purchase price as a down payment. Refinance mortgages don’t usually require a down payment since the borrower has already paid off some of the loans through their existing mortgage.
Purchase mortgages usually have longer repayment terms than refinance mortgages, as they are taken to finance the purchase of a new home, which is a larger financial obligation.
People usually go for refinance mortgages for two reasons.
Firstly, if someone feels they need a mortgage with a lower interest rate or a shorter payment term, they go for a rate and term refinance.
Secondly, if someone is in urgent need of cash, they can refinance up to 80% of the current value of their home for cash with cash-out refinance. The funds can be used as the borrower sees fit, such as for medical or educational fees, buying a new property, emergency funds, consolidating high-interest debt, etc. A significant amount of people use refinance mortgages to consolidate high-interest debt.
In conclusion, understanding purchase and refinance mortgages and knowing the difference between them is important.
Both mortgages have their own benefits and drawbacks. It is why borrowers should know about them properly before going for them, so they know what to expect.
It is also great to seek professional advice to know what type of mortgage is right for you and to make a much more informed decision.About The Author: Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a Principal Attorney.