The Difference Between Purchase and Refinance Mortgages

Blog posted On January 02, 2015

Purchase mortgages and refinances are both home loans, so what’s the difference? And more importantly, why do you need to know? To find out, let’s take a closer look at each.
Purchase mortgages, as the name implies, are mortgages used to finance the purchase of a home. Refinances, on the other hand, are used to “refinance” an existing mortgage. You can have a purchase mortgage without a refinance loan. But you can’t have a refinance without a purchase mortgage in the first place (because there would be nothing to refinance!).
On paper, how can you tell purchase mortgages and refinances apart? Mainly, the difference is in the purpose of the two loans:
·   Purchase mortgages enable you to become a homeowner.
·   Refinances empower you to change the terms of your original mortgage, which you may want to do for a variety of reasons.
For example, if interest rates are lower today than they were when you obtained your original loan, you might refinance to take advantage of the lower rate. (In fact, this is one of the most common reasons to refinance a purchase mortgage today.) But there are other reasons to refinance your mortgage as well. Here are just a few:
·   Convert an adjustable rate mortgage (ARM) to a fixed rate: Some experts believe interest rates will rise in the months and years ahead. If you have an ARM today, converting it to a fixed rate mortgage now could save you a lot of interest costs in the years ahead.
·   Free up your home equity: If you have a lot of equity built up, you could refinance your mortgage to “take cash out” for major expenses, such as college tuition.
·   Consolidate higher interest debt: If you have significant credit card, car loan or other high-interest rates, you might refinance your mortgage to access home equity and pay off those debts.
·   Get cash to buy another property: You could use the home equity freed up by refinancing to put down on another house, such as a vacation home or investment property.
·   Combine two mortgages: If you have a low interest, variable rate home equity line of credit (HELOC), you may be concerned that your rate will increase in the months and years ahead, as it adjusts upward to keep pace with market conditions. You could consolidate your HELOC with your purchase mortgage and have one low, fixed rate for all your mortgage debt, no matter how high interest rates in general might rise in the coming years. 
If I’m thinking about refinancing, what else do I need to know?
·   The interest rate on your refinance may be determined by whether or not you “take cash out.” In general, the more you take out, the higher your rate could climb. Ask your mortgage lender for how this may affect you.
·   You’ll follow a mortgage application process that may be very similar to the one used for your original purchase mortgage (credit check, income verification and so on).

·   You may need to obtain a new appraisal on your home, depending on when the last one was conducted.

·   You’ll need to provide your current mortgage payment information. Plus, you’ll need to contact your current mortgage lender to find out what the payoff amount will be.