Time Frame

• Conventional mortgage terms for both purchase and refinance mortgages are 15 and 30 years. Many people use adjustable rate mortgages with interest rates that change after one, three, five, seven or 10 years. Many banks write mortgage products called home equity loans. Most home equity loans have terms of 10 or 20 years, and many banks do not offer home equity purchase loans. Banks also write Home Equity Lines of Credit that work similarly to credit cards for 20 years. If the client owes a balance after 20 years, the line turns into a 15-year term loan. People can use home HELOCs for purchases or refinances.
  
  

Size

• All mortgages have size restrictions determined by maximum allowable Loan-to-Value ratios. In theory, Freddie Mac allows banks to write both purchase and refinance loans for up to 95 percent of the value of a home. In reality, most lenders do not refinance loans with an LTV above 80 percent, because mortgage insurers are not willing to cover loans in which homeowners have less than a 20-percent equity stake. Many banks offer portfolio purchase loans that do not require mortgage insurance and finance 90 percent or more.
  
  

Misconceptions

• The Federal Housing Administration provides mortgage insurance for first-time home-buyers and enables them to take out mortgages with 96 1/2 LTV ratios. Most people do not realize that the FHA also offers refinance loans. People can refinance with the FHA if they currently have an FHA backed loan. The new loan must lower their monthly payment and interest rate. The FHA backs both straight refinances and cash out refinances in which the borrower extracts equity.
  
  

Considerations

• Closing costs are considerably higher for purchase loans than for refinance loans. Homeowners have to pay insurance premiums in advance, including mortgage insurance premiums when they buy a home. During a refinance, existing insurance payments are simply transferred from the escrow account of the old lender to the new one. Banks require full appraisals costing between $300 and $400 for home purchases. On refinances, banks often use electronic appraisals that cost $15 to $30, and some FHA refinances do not require appraisals.
  
  

Function

• In some instances people effectively use refinance loans as purchase loans. People can take out loans on their primary residence and use the funds to buy a new property with cash. Lenders charge high rates for loans on non-primary homes, so using a primary residence to fund a rental saves money. Some homeowners use refinance HELOCs to pay for cars, boats and other purchases. Purchase mortgages, by definition are only used for home purchases.