Refinance Mortgage Rates vs. Purchase Rates

Are refinance rates the same as purchase mortgage rates?

1 Answer

This is a good question and a seemingly simple question with a somewhat complicated answer. Although the cliche "it depends" is the short version of the answer, it depends on a few more variables.

In short, yes, all rates for all mortgages, all other things being equal will be the same between purchases and refis. However, it's that "all other things being equal part" that can present some points of consideration.

So I will approach this from the point of view of a lender that is going to quote pricing on the loan. I will list the variables that I would need to know and then comment on each one as to the effect it might have on rates.

  • Is the refinance cash out?

This is a very important question regarding rates as the interest rate quoted in order to pull cash out is almost always higher than a purchase interest rate or a refinance that does not pull cash out (also known as "rate and term," because the loan simply seeks to change the interest rate and the term of the loan). Cash out occurs when the borrower on the loan receives anything $2001 dollars or more in excess of the original purchase price plus actual closing costs on the loan in question. So for instance if I bought a home for $100k and I want to do a refinance at $110k, that would be OK if if my closing costs were $10k and were rolled into the loan. It would even be OK if my closing costs were $8k and I got $2k cash back. however, anything over $2k would be considered cash out and I could be subject to a rate increase.

In another example, if I bought a home for $100k, had refinanced 2 years ago and pulled out another $50k, and now I am just seeking a loan to pay off those two loans and not get any additional cash out, the new loan would still be considered cash out because it is paying off a mortgage that was not originally used as purchase money. Cash out adds a layer of risk as far as the lenders are concerned and lenders compensate for risk by raising rates.

  • Is this a purchase loan for First Time Homebuyers?

This question is asked because some refinance programs are not available to first time homebuyers or they are subject to worse program that people wishing to refinance that have already proven their payment track record. On the other hand, there are a very few number of programs that actually subsidize first time homebuyers. Please remember that FHA, My Community, Home Possible and other programs widely considered to be first time buyer programs are in fact available to people that have owned homes before as well.

  • What is the difference in equity?

In a refinance, equity can be created by appreciation or principal reduction. In a purchase, equity is created by a larger down payment. If the equity levels are the same between two loans and the refinance is a rate and term, then the rates should be the same. If on the other hand, the refinance has a better equity position due to appreciation, the rate on this may be better than a purchase which usually has less equity than a refinance. Lenders refer to equity as LTV or Loan-to-Value ratio. This is the ratio of what you owe to what it's worth. The lower the better for rates. So the only way to get it low on a purchase is to have money down (though there are some other creative and less common ways).

  • What types of specials are lenders running?

Often times, lenders will run a special where they offer a temporary pricing incentive on all purchase transactions, or on all adjustable rate refinances, etc... Depending on lender's specials, pricing could be different for this reason as well.

At the end of the day, as a mortgage broker, I see the biggest different between refinance rates and purchase rates being the amount of equity. Most home buyers do not have as much cash to put down as a homeowner might have gained in equity over the past 3 years. If this is the case, then the purchaser's rates will be slightly worse. Keep in mind that if the purchaser and the refinancer were on equal footing in terms of equity, their rates would be the same.

So again, the short answer is no, rates are not different if the structure of the loans is the same otherwise. But throw in pricing specials, etc... and rates can chance on numerous programs for numerous reasons. Hopefully this complicated answer covers the uncomplicated question. If you need to understand anything else about this phenomenon, please contact me so I can update this page. If you don't rate me a 10/10, I get cranky.