Take a look at different mortgage loan purposes, how they work, and what it means for you.
Definition and Examples of Mortgage Loan Purpose
The mortgage loan purpose is the reason you are applying for a mortgage. Mortgage loan purposes can vary depending on your situation. For example, you may be looking to buy a property, or looking to refinance when interest rates have dropped. Your lender wants to know why you’re getting a mortgage. Your answer will help the loan’s underwriter determine the level of risk in lending to you, and the risk level can affect the interest rate your lender will charge you. Here are some common mortgage loan purposes:
Purchasing a primary residenceBuying a vacation homeBuilding a houseAcquiring an investment propertyRefinancing a homeApplying for a home equity loan
You’ll likely encounter the question of mortgage loan purpose when you apply for your mortgage, although this will depend on your lender.
Alternate names: Loan purpose, purpose of loan
How Mortgage Loan Purpose Works
Let’s say you and your significant other purchased a home 10 years ago. Since then, you’ve changed jobs, earned more money, and had two children. Together, you and your partner decide you’d like to do some construction on the house, including the installation of a pool. Altogether, the renovations will be costly, and you don’t want to drain your savings to finance it. After much discussion, the two of you decide to apply for a second loan on your home. Since this is a one-time purchase and not an ongoing need for funds, you decide on a home equity loan rather than a home equity line of credit (HELOC). The home equity loan functions similarly to your initial loan: You’ll get a lump sum of funds, and then make payments at fixed rates. When completing your mortgage loan application, you’ll want to indicate that you’re using the funds for renovations. This will be your mortgage loan purpose.
What Does Mortgage Loan Purpose Mean for You?
The reason you state for your loan will affect how your lender views your application. In the above scenario, a family further settling into a primary residence may be considered a less-risky option than others. Another example would be if you’re seeking to purchase an investment property. As an investment property isn’t one that you’re living in, lenders consider this a riskier proposition. Your interest rates will rise accordingly to account for this risk. Before applying for a mortgage, you should consider the purpose of your loan. This is especially true in cases when the mortgage loan purpose can increase your interest rates, such as the purchase of a vacation property. These types of mortgages will have higher interest rates than primary residences, although you can help offset these increases by making yourself an excellent borrowing candidate. This can be done in several ways, including:
Maintaining a high credit scorePaying off credit card balances in fullHaving a stable incomeNot incurring new debtHaving cash reserves
This advice doesn’t just apply to second homes or investment properties; being a good candidate can help lower your interest rates no matter the type of mortgage loan you’re pursuing.
