Differences Between Purchases and Refinances
Fees included in loan vs money to bring to closing
The biggest difference between a purchase loan and a refinance loan is that the customer generally does not have to pay closing costs and settlement charges for the refinance out of their pocket - the costs are included in the loan amount.
Additional items that will be included in the loan amount include a new escrow account for taxes and insurance will have to be opened - and the old one will be refunded from the current mortgage company, usually within 30 days (though we have no control over that timeframe).
Adjustments to the mortgage rate and cash out
On a purchase, the rate is the same up to 95% loan to value. On a refinance, the rate may vary based on whether you are taking out cash in addition to paying off the current first mortgage. If you are financing only the current first mortgage and not taking cash out - the rate stays the same up to 95% loan to value.
If you are taking cash out - there will be adjustments to the rate if the total loan to value is above 75%. A rule of thumb is that the rate goes up by 1/8th of a point for each 5% above 75%. Above 90% LTV cash out, the rate goes up alot more - and you can use up to 100%.
You can take cash out for any reason on refinance - to consolidate debt, home improvement, or just to put in the bank.
For a first mortgage and second mortgage to be combined into a first mortgage, the second mortgage has to be open at least 12 months, or the new mortgage will be considered a cash out mortgage. This is called seasoning.
On a new second mortgage - the underwriting rules are all different and not covered here.
Loan to Value (LTV) and Seasoning
Seasoning also refers to the value of the home. On a purchase the LTV is determined from the lower of the appraised value or the purchase price.
On a refinance, most lenders allow you to use the value from the appraisal. You can use an old appraisal if it is less than 6 months old (but check with the lender) but in most cases you will need a new appraisal.
Some lenders require you to own the home for 6 months to use the appraised value - this is called seasoning.
For a purchase, you will need a copy of the purchase contract and any amendments, and a copy of the earnest money deposit check. The customer will also need to get new homeowners insurance.
For a refinance, you will need a copy of the current mortgage payment slip with the correct account number and a phone number to call for the payoff. We will also need a copy of the current homeowners insurance declarations page, so the new mortgage lender can be insured when the new loan closes.
For a purchase, title insurance is generally higher than for a refinance. Count on $1-2 dollars per thousand dollars of the value of your home - the higher number if it is a purchase and lower if it is a refinance. These rates vary by state.
Sometimes you can get a re-issue rate on title insurance if you use the same attorney that did the first closing.
Tax Issues - Refinance
In a refinance transaction, points must be amortized over the life of the loan. For example, on a 30-year loan, you can deduct 1/30th of the points paid each year.
If you refinance for a second time, however, you can deduct the non-amortized points in the year you refinance the loan. Consult your tax advisor for more information.
Tax Issues - Purchase
Generally points are deductible in the year they were incurred if you itemize your deductions.
While many people assume that buyers should pay points to obtain a tax deduction, this is not always true. Of course tax deductibility is an important consideration, but it is only one factor to be weighed.
Paying points up-front to secure a low rate in an environment with declining interest rates could be unwise. If you decide to refinance shortly after a purchase, the up-front points and costs would have been wasted.