Loan Purpose
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Loan Purpose.
Pertaining to mortgages and their risk based pricing factors, the Loan Purpose factor is sub-categorized as follows:
1) Purchase. 2) Rate & Term Refinance. 3) Cash-Out Refinance.
Lenders asses that a Purchase Loan contains the least amount of Risk and thus 'price' Purchase loans most favorably...i.e. no interest rate increase or a risk-based pricing improvement in the order of .25%
Rate & Term Refinances are priced similar to Purchase loans, with no interest rate increase. Cash received by the borrower at closing may not exceed $2000 to maintain Rate & Term status. The purpose is, as the name implies, to reduce the interest rate, payment, and/or overall term of the mortgage.]
Cash-Out Refinances are deemed to have a higher risk factor than either rate & term refinances or Purchases due to the increase in loan amount relative to the value of the property. Risk-based pricing typically mandates a .25% to .5% increase in interest rate if a borrower needs to pull equity out of the subject property.
Also See Pre-qualification
