Are you in the middle of the process of buying a new house?
It takes a lot! Having multiple things on your mind, comparing options, and the pressure to identify and choose the best possible option makes the process quite overwhelming.
In this article, we’ll discuss the difference between buying and refinancing mortgages so you can determine if you want to opt for them and take the worry of them off your list. It will help you make informed decisions about your home financing needs and achieve your financial goals.
What is a purchase mortgage?
A purchase mortgage is a type of home loan used to purchase a new home, with the home serving 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 should be aware of them before opting for them.
What is a refinancing mortgage?
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 house continues to serve as collateral for the new loan.
You cannot get a refinance without a purchase mortgage, and this option is typically taken by people who want to modify their existing mortgage.
The most common types of mortgage refinance are cash, rate, and term refinance. If you are considering it, you should consult an expert to find out if mortgage refinancing is right for you.
Key differences between purchase and refinance mortgages
Purchase mortgages are used to purchase 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 purchase a new home. Refinancing mortgages are for the outstanding balance of the existing mortgage. Refinancing is basically transferring the outstanding balances on your loan to a new lender.
Interest rates for purchase mortgages are typically higher than refinance mortgages. That is why people opt for refinancing at a lower interest. The main reason to buy mortgages with higher interest rates is that lenders see people buying a new home as higher risk than those who are refinancing an existing one.
Purchase mortgages come with multiple fees such as origination fees, appraisal fees, etc. They significantly increase the total cost of the loan. These fees are typically lower for mortgage refinancing, since the lender replaces an existing mortgage rather than issuing a new one.
Purchase mortgages generally require around 20% of the purchase price of the home as a down payment. Refinance mortgages generally do not require a down payment since the borrower has already paid off some of the loans through their existing mortgage.
Purchase mortgages tend to have longer payment terms than refinancing mortgages, since they are taken out to finance the purchase of a new home, which is a larger financial obligation.
Why do people often opt for a refinancing mortgage?
People often choose to refinance mortgages for two reasons.
First, if someone feels they need a mortgage with a lower interest rate or shorter payment term, they opt for a rate and term refinance.
Second, if someone is in dire need of cash, they can refinance up to 80% of the current value of their home in cash with cash-out refinancing. The funds can be used however the borrower sees fit, such as medical or educational expenses, buying a new property, emergency funds, consolidating high-interest debt, etc. A significant number of people use refinance mortgages to consolidate high-interest debt.
In conclusion, it is important to understand purchase and refinance mortgages and know the difference between them.
Both mortgages have their own benefits and drawbacks. That’s why borrowers need to get to know them properly before looking for them, so they know what to expect.
It is also good to seek professional advice to find out what type of mortgage is right for you and make a much more informed decision.About the Author: Lyle Solomon has extensive legal experience, in-depth knowledge and experience in writing and consumer finance. He has been a member of the California State Bar Association since 2003. He graduated from the University of the Pacific McGeorge School of Law in Sacramento, California, in 1998 and currently works for Oak View Law Group in California as Senior Counsel.