Purchase mortgage or refi: Which is best?

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In a recent article, I suggested that a home buyer with enough money to pay all cash, but who needed to recover some of the cash for other purposes, might do better to pay all cash and refinance later. I did point out that the rate on a cash-out refinance would be a little higher than that on a purchase mortgage, but this might be less compelling than the greater ease of shopping for a refinance. Astute readers pointed out some other differences between a purchase mortgage and a refinance that might well tip the advantage in the other direction. 1. The tax laws view these two transactions very differently. On a purchase loan (the Internal Revenue Service calls it "acquisition indebtedness"), interest is deductible on loan balances up to $1 million, and on a refinance ("equity indebtedness"), deductibility cuts off at the $1 million level. Similarly, on a purchase loan any points paid on the transaction are wholly deductible in the transaction year, but on a refinance, points must be p...