The Price Difference Between Purchases and Refinances

November 23, 2020

With Thanksgiving now in our laps, now that the political controversies are settling down somewhat, Orion’s brokers are laser-focused on helping clients and doing business. Orion’s AEs, as well as our back-office staff, are very well-versed at doing both refinances and purchases for your clients. And brokers know that there are three main types of mortgages: purchase, rate and term refinances, and cash out refinances. The processes for all are very similar, but each has nuances. Our AEs are often asked, “Why is there a difference in price between a purchase and a refinance, all other things being equal?”

The basic reason is that, through various decades and economic cycles, home purchase mortgages default the least. Rate and term refinances involve redoing your client’s current mortgage by obtaining a new interest rate and loan term, without changing the loan amount, and cash out refinances result in a larger loan amount at closing because the borrower is pulling equity from their home. A borrower now has more debt, and maybe even has a higher monthly mortgage payment as a result, and thus the default risk rises.

This results in a higher mortgage rate to compensate for increased risk. Cash out refinance rates are the highest.

Orion’s rate and term refinances theoretically result in the least amount of default risk because the borrower is reducing their monthly payments via a lower interest rate and possibly a lower outstanding balance(paid down since origination) spread out over a brand-new loan term. But usually the lowest mortgage rates are usually offered on home purchase transactions because historically they have the lowest delinquency and foreclosure levels.

Borrowers coming to you for a loan, regardless of type, may not even see the difference, since a client coming to you to help finance a purchase doesn’t care about refi rates, and a client coming to a broker for are finance doesn’t care about purchase rates. Orion’s experienced brokers, however, warn clients to be on guard for lenders who advertise low rates for a certain product, knowing that other products will be more expensive. Brokers tell clients that when shopping for a mortgage, take notice of who is charging more/less for certain transaction types and choose accordingly. And it is impossible to put a price on service. And having your client’s loan close on time, especially with the holidays upon us, is something we pride ourselves on at Orion.

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