A mortgage refinance and a purchase mortgage both end with a new loan secured by real estate, but that is where the similarity ends. A purchase mortgage creates new debt to acquire a home you don’t yet own; a refinance replaces the existing loan on a home you already own with a new one on different terms. That one distinction drives nearly every difference you’ll notice in cash required, tax treatment, paperwork, timeline, and legal protections.
What Each Transaction Is Actually Doing
A purchase transfers ownership from a seller to you. There’s a sales contract, a price to negotiate, a title to transfer, and a lender placing its first lien on the property to secure the money you borrowed to buy it. Every procedural step exists to confirm the property is worth the price and that you can carry the payments.
A refinance involves no change in ownership. You already hold title. The new loan pays off the old one, and the lender records a new lien in place of the old one. No seller, no sales contract, no title transfer.
Refinances usually take one of two shapes. A rate-and-term refinance changes your interest rate, your repayment period, or both, while keeping the balance roughly the same. A cash-out refinance replaces your current mortgage with a larger one and hands you the difference in cash, drawing on the equity you’ve built.
Cash at Closing
The most visible difference is the down payment. A purchase requires one; a refinance does not. Conventional purchase loans allow down payments as low as 3% of the price, though 20% down avoids private mortgage insurance. On a $400,000 home, that puts the down payment somewhere between $12,000 and $80,000 before you get to any other fee.
Closing costs land in similar ranges for both, typically 2% to 5% of the loan amount, covering lender fees, appraisal, title services, and government recording charges.1Fannie Mae. Closing Costs Calculator On a refinance you can often roll those costs into the new loan balance, which spares you a check at closing but raises what you owe. Purchase buyers sometimes negotiate seller credits to offset closing costs, an option that simply doesn’t exist when there’s no seller.
Title insurance is one line item where refinancing tends to cost less. Because a title policy was already issued when you bought the home, many insurers offer a discounted reissue rate on a refinance within a certain number of years. The size of the discount depends on the insurer and how old the original policy is.
How LTV and PMI Play Out Differently
On a purchase, your loan-to-value ratio is calculated against the lower of the appraised value or the purchase price. Put 10% down and you’re at 90% LTV. On a refinance, LTV is based entirely on a fresh appraisal of current market value. A rate-and-term refinance may drop your LTV if the home has appreciated; a cash-out refinance raises it because you’re borrowing more. Most lenders cap cash-out refinances near 80% LTV.
PMI is required on conventional purchase loans when the down payment is under 20%, and it protects the lender if you default.2Fannie Mae. What to Know About Private Mortgage Insurance You pay it monthly until your equity reaches 20% of the home’s original value, at which point you can request cancellation.3Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance (PMI) From My Loan?
A refinance resets that calculation. If a new appraisal puts your LTV at or below 80%, you can refinance into a loan without PMI even if you’ve been paying it for years. The reverse also happens: a cash-out refinance that pushes LTV above 80% can add PMI to a loan that didn’t have it.
Tax Treatment
Not all mortgage interest is deductible, and how the borrowed money was used determines what qualifies.
Interest Deduction
Interest on debt used to buy, build, or substantially improve your home qualifies as acquisition indebtedness and is deductible on balances up to $750,000, or $375,000 if married filing separately. A standard purchase mortgage falls squarely into that category. The $750,000 cap was originally set to expire after 2025, but Congress made it permanent in mid-2025.4Office of the Law Revision Counsel. 26 USC 163 – Interest
A rate-and-term refinance generally keeps full deductibility because you’re replacing acquisition debt with new acquisition debt of roughly the same size. Cash-out is where it gets complicated. The extra money you borrow above the old balance is only deductible if you use it to substantially improve the home securing the loan. Use those proceeds to pay off credit cards or buy a car, and the interest on that portion isn’t deductible. Keeping clear records of how cash-out funds were spent matters at tax time.
One useful wrinkle: if your original mortgage was taken out before December 15, 2017, the older $1,000,000 deduction limit applies to that debt. When you refinance that older loan, the new loan inherits the original date under the grandfathering rule, as long as the refinanced balance doesn’t exceed what you previously owed.4Office of the Law Revision Counsel. 26 USC 163 – Interest
Points
Points paid at closing are prepaid interest, and the deduction rules split sharply. On a purchase loan for your primary residence, you can deduct the full amount in the year you pay them if you meet several conditions: you paid the points from your own funds rather than borrowing them from the lender, the amount was calculated as a percentage of the loan, and paying points is a standard practice in your area.5Internal Revenue Service. Home Mortgage Points
On a refinance, the IRS makes you spread the deduction over the life of the loan. Pay $3,000 in points on a 30-year refinance and you deduct $100 a year. There’s one exception: if you refinance again or pay the loan off early, you can deduct whatever portion of the points hasn’t yet been claimed.5Internal Revenue Service. Home Mortgage Points
Approval, Appraisal, and Timeline
A purchase transaction is the more involved of the two. It begins with a signed sales contract that fixes the price, closing date, and contingencies. The lender orders an appraisal and title search; you typically pay for a home inspection; underwriting evaluates your income, debts, and credit; and closing brings together buyer, seller, agents, and a closing agent or attorney. If the appraisal comes in below the agreed price, the lender will only finance up to the appraised value. You then cover the gap with cash, negotiate a price reduction, or walk away if the contract has an appraisal contingency. That scenario is one of the most common reasons purchase deals fall apart.
A refinance skips the sales contract, home inspection, and most of the title work. The lender orders an appraisal to confirm current value, and some accept a desktop or drive-by valuation rather than a full interior inspection. Documentation focuses on your current financial picture: pay stubs, bank statements, tax returns, and a payoff statement from your existing lender. A low refinance appraisal is less catastrophic but still stings: it can reduce how much you can pull out on a cash-out, push your LTV above 80% and trigger PMI, or make the numbers stop working. There’s no second party to negotiate with. You accept it, challenge it with comparable sales, or wait for values to improve.
Closing itself involves only you and the closing agent. A refinance typically runs 30 to 45 days from application to closing, versus 45 to 60 days for a purchase.
The Three-Day Right to Cancel a Refinance
Federal law gives you three business days after closing to cancel a refinance on your primary residence, for any reason. The lender must provide written notice of this right, and the clock doesn’t start until you’ve received that notice along with your closing documents and Truth in Lending disclosure.6Consumer Financial Protection Bureau. Regulation Z 1026.23 Right of Rescission
To cancel, you notify the lender in writing before midnight on the third business day. The notice counts as given when you mail it, not when the lender receives it. If the lender failed to provide the required disclosures, the cancellation window can extend up to three years.6Consumer Financial Protection Bureau. Regulation Z 1026.23 Right of Rescission
Purchase mortgages are excluded from this protection. In a purchase, the seller has already handed over the property and is relying on the funds; unwinding financing days later would upend the transaction. Because a refinance involves only you and the lender and the property doesn’t change hands, cancellation is manageable. One practical effect: your refinance funds won’t actually be disbursed until the three-day window expires.
Existing HELOCs and Subordination
If you have a home equity line of credit or second mortgage when you refinance your first mortgage, you’ll run into a subordination agreement. When the old first mortgage is paid off and a new one recorded, the HELOC would automatically move up to first-lien position, which the new lender won’t accept. A subordination agreement is a document in which the HELOC lender agrees to stay in the junior position behind the new first mortgage.
Getting it requires contacting your HELOC lender, completing their paperwork, and waiting for approval. Some charge a fee; some refuse to subordinate, which can force you to pay off the HELOC entirely before the refinance can close. Factor this in early if you carry secondary debt. Purchases avoid the issue completely because a newly acquired property has no existing liens.
Which One Fits Your Situation
A purchase is the only option when you need a different home, whether that’s upsizing, relocating, or acquiring an investment property. You’re buying an asset that doesn’t belong to you yet.
A refinance makes sense when you want better terms on a home you plan to keep: a lower rate, a switch from adjustable to fixed, a shorter term to build equity faster, or a cash-out to fund improvements or consolidate higher-rate debt. A mortgage rate, even on a cash-out, will almost always beat credit card interest.
The number that matters most on any refinance is the break-even point: how many months of savings it takes to recoup your closing costs. Divide total closing costs by your monthly payment reduction, and the result is the number of months before the refinance starts saving you money. If you plan to sell or move before then, the refinance is a net loss. Be honest with yourself about how long you’ll stay before committing.