Loan Purpose
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Pertaining to mortgages and their risk based pricing factors, the loan purpose factor is sub-categorized by purchase, Rate & term refinance and cash-out refinance.
Lenders assess 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.
