Why are refinancing rates higher? It all has to do with risk

Mortgage FAQ: “Why Are Refinancing Rates High?”

If you’ve been comparing mortgage rates lately in an attempt to save some money on your home loan, you may have noticed that refinance rates are higher than purchase loan rates.

This appears to be the case for a lot of the big banks, including Chase, Citi, and Wells Fargo, which, while huge institutions, aren’t necessarily leaders in the mortgage space anymore.

In fact, today, United Wholesale Mortgage holds the top spot, followed by Rocket Mortgage, and then a mix of these major banks and nonbanks, including CrossCountry Mortgage, Fairway Independent Mortgage, and others.

So why do some major companies list “purchase rates” and “refinance rates” separately, with different rates, points, and APRs?

Well, for starters, buying a home isn’t the same as refinancing a mortgage, although both processes are very similar, and the underlying loans themselves aren’t much different.

Ultimately, a home equity loan is intended for those who have not yet purchased a property, while a mortgage refinance is intended for the current homeowner who wants re Their home loan.

We know they’re different goals, but if the underlying loans are 30-year fixed mortgages with the same loan amounts, the same borrower credit scores, and the same property types, why should the rates be different? Let’s find out.

Buy the home mortgage at least default

There are three main types of mortgages, including home equity loans, rate and term refinancing, and cash-out refinancing.

The first is self-explanatory and has been explained above, the second is simply renewing your existing mortgage by taking out a new interest rate and loan term, without changing the loan amount.

The third type results in a larger loan amount at closing because you are withdrawing equity from your home, which the average person should assume would be the riskier transaction.

After all, if the borrower owes more debt as a result, and perhaps has higher monthly mortgage payments, the risk of default is bound to rise.

Simply put, when you take cash out of your home, you increase your outstanding loan balance, increase your loan-to-value (LTV) ratio, and reduce your home’s available equity.

This is inherently riskier, and explains why there are specific adjustments to mortgage rates for such loans.

This in theory should result in a higher mortgage rate to compensate for the increased risk. And guess what – this is actually the case!

Cash-out refinancing rates are the highest, all other things being equal, for essentially all banks and lenders. At least there is something logical here…

Refinancing with the interest rate and term seems to be the least risky, right?

Refinancing rates

Now, the refinancing rate and term should result in the least risk of default because the borrower will likely reduce their monthly payment in the process. This is generally the reason for refinancing in the first place.

This occurs through a lower interest rate and possibly a lower outstanding balance (paid since origination) spread over a brand new loan term.

That leaves us with home equity loans, which you’d think would be less risky than a cash-out refinance, but not as risky as a rate-and-term refinance, since it’s ostensibly a first-time homebuyer or someone in a new property.

If you are the bank, you may want to make a new, cheaper loan to an experienced homeowner who has been paying their mortgage for years rather than a first-time buyer or even a buyer coming forward with more debt.

But for one reason or another, some banks and mortgage lenders offer the lowest mortgage rates on home purchase transactions.

The lowest mortgage rates are offered on home equity loans

The reason boils down to Data. Although the actual loan characteristics (such as FICO score, LTV, and DTI) will be as well Indicates Lowest Default Rates On term and refinancing rates, purchase loans are the ones that perform best.

One possible reason for this is faulty appraisals for refinances, which may overstate the value of properties.

despite, Purchase default mortgages are the lowestfollowed by rate and term refinancings, and finally cash-out refinancings, the latter of which actually makes sense.

Interestingly, the characteristics of the loans also suggest that cash out and buyout mortgages should default at roughly the same rate, yet they are priced far apart.

And again, this is because in real life, no is expected Default rates, purchase loans default the least, and cash outs default the most.

Lowest: Home purchase prices
a little higher: Term refinancing rate and rates
the above: Cash-out refinancing rates

Therefore, when comparing mortgage lenders, you may often find that purchase rates are the cheapest, followed by interest rates, term refinancing rates, and finally mortgage exchange rates.

There is no doubt that cash-out refinances are the most expensive – this is the norm among all banks and lenders as far as I know.

But not all banks/lenders offer different purchase rates, rates and fixed terms. Sometimes their price is exactly the same.

How much do refinancing rates cost?

  • Bigger banks tend to advertise higher refinancing rates versus purchase rates
  • Some lenders do not differentiate between purchase rates, refinance rates, and refinance rates
  • Or simply charge slightly higher closing costs on refinancing transactions
  • Rates may be 0.25% to 0.375% higher on refinances but pay attention to the points charged and loan assumptions.

I looked around and found that Chase, Citi, and Wells Fargo offer lower rates on home purchases, while Quicken Loans offers the same exact purchase rates, rates, and terms.

Quicken even says this in the fine print: “Based on purchasing/refinancing a primary residence with no cash out at closing.”

In other words, the purchase, price and reference term are priced at the same price.

This is obviously important when shopping for a mortgage, so pay attention to who charges more/less for certain types of transactions and choose accordingly based on what you’re looking for.

The same may be true for an FHA loan versus a conventional loan. Depending on what you need, one lender may offer a much better rate.

One last thing – pay attention to the assumptions lenders make when they list their rates. It’s also possible that you’re not comparing apples to apples, if there are different loan amounts, LTVs, credit scores, mortgage scores, etc.

But know that refinancing rates are higher because they default more than purchase loans, and that requires a higher rate to compensate for the increased risk, plain and simple.

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