Today, we’ll explain the difference between purchase and refinance mortgages.
The bottom line is that purchase and refinance mortgages are both home loans; however, they serve vastly different purposes.
- A purchase mortgage is a type of loan that homebuyers secure to finance the purchase of a new home.
- A refinance mortgage is the process existing homeowners go through to lower their mortgage rate.
While purchase and refinance mortgages may have similar up-front requirements, the process and end results are drastically different.
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Purchase vs Refinance: Difference Between Purchase and Refinance Mortgages
Purchase and refinance mortgages are both types of home loans; however, they accomplish very different goals.
A purchase mortgage is a loan that homebuyers secure to finance the purchase of a new home whereas a refinance mortgage is the process existing homeowners go through to lower their mortgage rate.
What is a Purchase Mortgage?
A purchase mortgage is a type of loan that homebuyers use to finance a new home.
Purchase mortgages vary greatly from one homebuyer to another.
Finding the best option typically depends on your financial situation and property details.
District Lending Loan Officers are experts in both purchase and refinance mortgages and are available to answer your questions and to help you secure the right loan based on your financial goals.
How Does a Purchase Mortgage Work?
Purchase mortgages work by providing borrowers with the funds they need to buy a home.
The process of obtaining a purchase mortgage typically involves several steps, which we’ll outline below:
- Pre-Approval: The first step in the purchase mortgage process is to get pre-approved for a mortgage. This involves submitting an application to a lender and providing them with information about your income, employment, credit score, and debt-to-income ratio. Based on this information, the lender will determine how much they’re willing to lend you and what interest rate they’ll charge.
- Finding a Home: Once you’ve been pre-approved for a mortgage, you can start looking for a home. With the help of a real estate agent, you’ll visit homes that fit your budget and your needs. Once you’ve found a home you want to buy, you’ll make an offer to the seller.
- Applying for the Mortgage: If the seller accepts your offer, you’ll need to apply for the mortgage. You’ll provide the lender with more detailed information about your income, employment, and credit history, as well as information about the property you’re buying. The lender will review your application and verify your information.
- Underwriting: After you’ve submitted your mortgage application, the lender will begin the underwriting process. This involves a thorough review of your financial history and the property you’re buying. The lender will verify your income, employment, and credit score, as well as review the property appraisal to ensure that the home is worth the purchase price.
- Closing: Once the underwriting process is complete, you’ll be ready to close on the mortgage. At the closing, you’ll sign a variety of documents, including the mortgage note and the deed to the property. You’ll also pay any closing costs and make your down payment.
- Repayment: After you’ve closed on your mortgage, you’ll start making monthly payments. Your payment will include both principal and interest, and the amount you pay each month will depend on the size of your loan, the interest rate, and the term of the loan. Over time, as you make your payments, you’ll build equity in your home.
In summary, a purchase mortgage is a loan that provides borrowers with the funds they need to buy a home.
What are the Biggest Factors for a Purchase Mortgage?
While many factors can impact a purchase mortgage, generally, your credit score, down payment, and appraisal impact your terms the most.
There is no exact credit score requirement for purchase mortgages. The requirements are different depending on the lender. Generally, a credit score between 580 and 620 or higher will put homebuyers in a good position to qualify for a loan. A credit score above 620 means you’ll typically get more favorable terms on the loan.
Homebuyers using a purchase mortgage need to secure down payment funds. Down payments typically range between 3% to 25% of the purchase price, depending on the loan. Some loans, such as a VA Loan, don’t require a down payment.
Once an offer is accepted, homebuyers need to secure a home appraisal. As long as the home appraises at purchase price, homebuyers won’t run into any issues. If the appraisal comes in lower than the planned purchase price, the lender may have to adjust the final closing costs to account for the appraisal shortfall.
The last step of the purchase mortgage process is to finalize the loan application with underwriting and pay the closing costs. Closing costs are the various fees buyers face when purchasing a new home. Closing costs can accrue from lenders and third parties involved in your loan transaction, such as home appraisers, escrow, and title companies, among others.
What is a Refinance Mortgage?
A refinance mortgage helps existing homeowners change their mortgage rate and terms to lower their interest rate, monthly payment, or cash out some of their property’s equity.
There are two types of refinances mortgages available for existing homeowners:
- Rate and Term Refinance: A rate and term refinance is when a homebuyer changes an existing mortgage to lower the interest rate or change the loan duration without increasing the loan amount.
- Cash Out Refinance: A cash out refinance is when a homebuyer changes an existing mortgage into a larger mortgage that changes the interest and the terms of the loan and advances money to the borrower. Borrowers normally get cash-out mortgages for home improvements and/or debt consolidations.
How Does a Refinance Mortgage Work?
A refinance morgage is the process of replacing an existing mortgage with a new one, usually with better terms.
Refinancing can help you save money on your monthly mortgage payments, lower your interest rate, or change the term of your loan.
In a nutshell, here’s how refinancing works:
- Evaluate your current mortgage: Before you start the refinancing process, you’ll need to evaluate your current mortgage. This includes looking at your interest rate, monthly payments, and the term of your loan. You’ll also want to check your credit score to ensure that it’s improved since you took out your original mortgage.
- Determine your goals: Once you’ve evaluated your current mortgage, you’ll need to determine what you want to accomplish through refinancing. For example, do you want to lower your monthly payments, reduce your interest rate, or shorten the term of your loan?
- Shop around for lenders: Once you know what you’re looking for, you can start shopping around for lenders. You’ll want to compare rates, terms, and fees from multiple lenders to find the best deal. You can do this online or by working with a mortgage broker.
- Apply for the new mortgage: Once you’ve found a lender you like, you’ll need to apply for the new mortgage. You’ll provide the lender with information about your income, employment, credit score, and the property you’re refinancing.
- Appraisal and underwriting: After you’ve submitted your application, the lender will order an appraisal of your home and begin the underwriting process. They’ll verify your income, employment, and credit score, and review the appraisal to ensure that your home is worth the amount you’re refinancing for.
- Closing: Once the underwriting process is complete, you’ll be ready to close on your new mortgage. At the closing, you’ll sign a variety of documents, including the mortgage note and the deed to the property. You’ll also pay any closing costs and make any necessary down payments.
- Repayment: After you’ve closed on your new mortgage, you’ll start making payments on your new loan. Your monthly payments will be based on the size of your loan, the interest rate, and the term of your loan.
In summary, a refinance mortgage is the process of replacing an existing mortgage with a new one, usually with better terms.
Conclusion: Difference Between Refinance and Purchase
In conclusion, purchase and refinance mortgages are different types of home loans that serve different purposes.
A purchase mortgage helps you buy a home vs. a refinance mortgage helps an existing homeowner secure more favorable terms.
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About the Author
Brian Reese is a senior advisor and co-owner at District Lending. He is one of the world’s leading experts in veteran benefits, having helped millions of veterans secure their financial future since 2013. Brian is the founder VA Claims Insider, an education-based Coaching & Consulting company whose mission is to educate and empower veterans to get the VA disability benefits they’ve earned for their honorable service. A former active-duty air force officer, Brian deployed to Afghanistan in support of Operation Enduring Freedom. He is a distinguished graduate of management of the United States Air Force Academy and earned his MBA as a National Honor Scholar from the Spears School of Business at Oklahoma State University.
In Brian’s Own Words:
“As a military veteran, I’ve made it my life’s mission to help people live happier and wealthier lives. District Lending brings this mission to life. We believe in integrity, honesty, and transparency, which is why you’ll see our rates right on our website. You’ll find lower rates and zero lending fees, which means you can buy your dream home for less. The savings are passed on to you — the way it should be.”
– Brian Reese, Advisor and Co-Owner, District Lending