Loan Purpose | How loan purpose affects your mortgage rate

When applying for a mortgage, the first question on the mortgage application is, "what is the loan's purpose?" You have two options, purchase or refinance. I'll explain how the differences affect the interest rate in this article. 

A purchase loan is a mortgage from a lender used to buy a house. You borrow money from a bank or mortgage company and use it to purchase real estate. Use a mortgage to purchase single-family, townhome, condominium, or multi-family 1-to-4 property. It can be a second home or an investment. 

A refinance loan is a mortgage from a lender used to replace your current mortgage. When you refinance your home, you borrow money from a bank or mortgage company to repay your existing loan.  

Homeowners refinance for many reasons, usually to save money or take some cash out.

A "rate and term refinance" allows you to change your interest rate and loan term. For example, you could switch to a loan with a lower interest rate to reduce your monthly payments. Or you could shorten the period from a 30-year fixed to a 15-year fixed to pay it off faster, so you pay less over time.

A "cash-out refinance" works like a rate and term refinance, but you also withdraw a portion of your home's equity. Cashing out replaces your current mortgage with a bigger one. 

Take advantage of the equity you've built up. Use the money for almost anything, such as home improvements, paying off high-interest debts, or other financial goals.

Does loan purpose affect the interest rate?

The purpose of the loan may affect the interest rate and your monthly payment, depending on the details. 

Although mortgage rates for purchasing and refinancing are typically the same, you should expect a higher rate and monthly payment for a cash-out refinance.

Because lenders consider cashing out a higher risk, they increase interest rates for cash-out refinances. As a result, you should expect rates about 0.25% to 1.000% higher when shopping for a cash-out refinance.  

Of course, everyone's situation is different, and mortgage rates change with market conditions—schedule time to talk with a home loan expert at NewCastle Home Loans. 

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