Is a Free Refinance Later Really Free? Buy Now, Refinance Later Explained

Auto-generated captions cleaned for readability. Commercial breaks and repeated housekeeping have been trimmed; licensing information appears at the bottom of this page.

The Fed holds again

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom. Today we're going to talk about the many lenders out there promising to give you a free refinance once rates drop, if you'll purchase now while rates are still high. They're trying to get your business today rather than have you wait — close the deal now, and they'll refinance you at no fee down the road once rates are better. So: how does it work, what does a refinance actually cost, how could they be offering this for free, and what are the best ways to choose a lender today and again when you go to refinance later?

First, though, the Fed made their big announcement today, and for the second time in a row they are holding rates steady. I watched the press conference. It still sounds very much up in the air. Two meetings ago the chairman said they were going to raise rates one more time before the end of the year, and now they've held them steady twice. The next meeting isn't until the middle of December, so we'll see whether they follow through with one more hike or whether — fingers crossed — we're done and rates don't move any further.

The release itself said the same thing we've been hearing: employment is resilient, the economy is resilient, inflation is coming down but not to the levels they're hoping for yet, so they're going to keep rates higher than any of us want to see until inflation gets back down to their 2% target. In a nutshell, things are holding steady for the next six weeks. We're not going to see a big rate move up or down.

Obviously rates still move daily. And I'll say this quickly again, because it matters: mortgage rates are not 100% tied to the Federal Reserve prime rate. They move with the markets, like stocks and bonds do — with the Treasuries, with mortgage-backed securities, with who's buying and who's selling and where investors are putting their money. That's what actually moves our mortgage rates. Our rate sheets change every single day, but for the most part we should stay in the same general area at least until the next Fed meeting.

The offer: buy now, refinance later at no cost

Here's what brought this to my attention. One of the women on my team sent me an article — we're all reading these every day, keeping up with the market. This one ran in Entrepreneur magazine, published just yesterday, and it's the exact conversation we have inside our own walls constantly. So let's walk through it, paragraph by paragraph, and I'll add what I need you to know.

The headline question is: some lenders are offering “buy now, refinance later” at no cost — but is there a catch? Soaring mortgage rates have priced buyers out of the market, and some experts are saying buy now and refinance later. Is it really that easy?

The article says mortgage rates have soared over the past year and now stand at 7.79% for a 30-year fixed per Freddie Mac. That is about the average rate right now on a 30-year fixed. As always, the kind of loan you get, your down payment or the equity you have for a refinance, your credit score, and the type of property all determine your actual rate — but on average today, a 30-year fixed conventional loan is 7.79%.

Amid those rates, many would-be buyers have been priced out, and the housing market has cooled from the competitive market we saw through much of 2021 and 2022. So now lenders have a proposition for people deterred by nearly 8% rates: buy the house now and refinance later at no cost. Typically under one of these deals, buyers are given the option to refinance if rates decrease without bearing a significant portion of the closing costs, which averaged $2,375 in 2021 according to the Wall Street Journal.

What a refinance actually costs

Let me break that number down, because I want you all in the know. Refinance cost, when they talk about it that way, means the one-time cost incurred to do the loan: the lender fee, underwriting, the appraisal, processing. It does not account for impounding your property taxes and insurance — having to collect those escrow payments up front — and it doesn't account for the interest collected at closing to carry you through the month before you skip a payment. There are recurring closing costs that aren't in that $2,375.

In reality, an actual refinance will typically run you somewhere in the range of $4,000 to $6,000, depending on your loan size, your property value, your property tax bill, and your homeowners insurance bill — and that's if you're not paying discount points to buy the rate down. So keep that in mind. You might think, gosh, my refinance cost me $6,000. Go back and look at the one-time costs versus the recurring ones. You always have property taxes. You always have homeowners insurance. Those have to be collected at the end of a loan to set up the impound account on the new one.

Nobody works for free

The article continues: the specifics of the deal vary, as some lenders with the buy-now-refinance-later option cover all closing costs, while others may only waive their own fees or roll the costs into the loan.

So let's talk about that. We just went through the one-time costs: an appraisal fee, an underwriting fee, a processing fee, a doc drawing fee, the escrow fee, the title fee. Then you have the recurring costs. Some of these lenders are saying they'll cover all closing costs. Others are saying they'll only waive their own fees.

The first question is whether the lender you're going back to — because they promised you the free refinance — actually has the best rates when you get there. They can tell you they'll cover every single dollar, work with me today, and when rates come down I'll take care of you. But what does that really mean? You don't know what their rate will be versus somebody else's at that time. Are they the most competitive lender? Are they giving you a higher rate so they can earn a rebate to pay those closing costs?

Let me just tell you: closing costs do not go away. They are never free. There is not a single title insurance company that isn't going to charge for the policy they issue on your property. There is not a single appraiser who will drive out to the home, appraise it, and not send a bill. Nobody does anything for free. So how does a lender pay those fees if they're not charging you a dime? Either they roll the fees into the loan — so you're not paying cash out of pocket, but your loan balance goes up, which is not really a free refinance — or they give you a higher interest rate than the lowest one available in the market so they can collect a rebate and pay those costs on your behalf. Is it ever truly free? No. It's not.

The expiration date problem

The article quotes a financial professional in Atlanta saying that while the offer may seem enticing, there are caveats — nothing is free. Some of the offers have time restraints and short expiration dates, resulting in no real savings, because failing to refinance within the time frame means missing out on the deal and potentially paying full closing costs out of pocket.

So a lender says: I'll do your loan today, and I'll do a free refinance as long as you complete it within the next 6 months, or 12, or 18. But how do we truly know? I said at the top of the show that the Federal Reserve is leaving rates unchanged and believes it will have to keep rates high for a substantial amount of time to get inflation under control. What is a substantial amount of time? I would love to see rates start coming down by the third quarter of next year, with all of us on a path to better payments. Is that what's going to happen? Nobody truly knows.

If you don't refinance in the window they gave you, because rates haven't come down, you lose the opportunity — and you may have agreed to use them for the purchase in the first place thinking the package deal made it a better deal, when in reality you could have shopped a little further and gotten a better rate from a lender who wasn't offering you a package. Investopedia is quoted making the same point: if the lender's credits expire after a year or two, they lose their value if rates don't decrease in that period.

An analyst from Bankrate, quoted in the same piece, says that instead of taking the free-refinance deal now, taking the lowest rate available without strings attached and later searching for the most competitive refinancing deal may actually yield more savings down the line. And a fellow at the Urban Institute adds that a buy-now-refinance-later deal doesn't necessarily mean a buyer will be eligible to cash in on the offer by the time they're ready: if credit deteriorates or the property's value significantly drops, you may not be able to refinance at all.

The equity trap, and why HARP isn't coming to save you

Let's talk about that, because I've said it before and I want to drive it home. When you buy something, buy something you can afford — a monthly situation you can carry for the long term. When rates drop, obviously we want to get you a better deal, a lower payment, better cash flow. That's the name of the game. But the most important thing you can do is get into something you can afford assuming it can't change and won't change, and that you're stuck with it. Is that a payment you can handle?

Here's why. Say you purchase with 5%, 10%, or 15% down, and property values drop by 10% — not an abnormal fluctuation. Values go up, values come down, and they usually come back higher than where they left off. But if they drop 10% and you put 5% or 10% down, you won't have the equity needed to do the refinance. Which means even though rates have dropped, you can't refinance. You are stuck in the payment you have.

We got really lucky during the Great Recession. In 2009 the government introduced a program called HARP, a refinance where we could take somebody who was upside down on value — we didn't care what the property was worth, we didn't care how much they owed — and refinance the loan, drop the rate, and get that borrower into better terms. But we'd all have to sit and hope a program like that gets reintroduced. It is not here right now. We can't count on something that doesn't exist.

So please don't purchase something today thinking “yes, it's too much for me, but I'm going to refinance later when rates drop.” What I want to hear is: “I don't love the payment, but I can afford it, I can afford it for a long time, and if it never changes that's okay, because I love this house and this is where I want to be.” Then when rates come down, we make it better.

Q&A: buy down the rate now, or wait?

Heather asks: “Would you recommend buying down your rate now when you buy? Is it worth it, or should you wait to refinance?”

Great question. If I were buying a home right now, knowing we're eventually going to see lower rates — probably a year out or so, and nobody has that crystal ball — I don't know that I'd invest in buying points down at this point. However, if it makes a big difference in your cash flow and in what you can afford, it's definitely something to consider. And if it's something you can get the seller to pay out of their cash proceeds — if you can negotiate credits toward closing — that could absolutely bring the rate down and make the payment more affordable for now, without cash out of your own pocket that you'd throw away if you refinance in a couple of years. Buying points is great sometimes, but we have to look at the whole picture for each individual situation.

Q&A: if I wait for rates to drop, will prices go up?

Heather also asks: “Do you think if I wait to buy until rates come down that prices may go up? I'm hearing that once rates start coming down, prices will go up due to low inventory.”

We've talked about this before, and I do believe that when rates come down to a point that makes buying way more affordable, everybody who has been waiting jumps on the bandwagon and starts trying to buy. What inventory levels will be at that point, who's to say. If inventory stays where it is now — nowhere near enough homes for sale — it is going to turn into utter chaos like 2020 and 2021.

So if you can afford a monthly payment right now, right now is a great time to buy, because the competition is far less than what I assume we'll see in the future. I also think it's important for people to hear me say the other half: if you can't afford to purchase, you have no business purchasing. We want everybody who signs on the dotted line and agrees to repay a monthly payment to be able to afford it. That's very important. But if you can afford it, and the payment fits your monthly expenses, then right now is a fabulous time to buy. Much less competition, and a lot easier to negotiate.

We just had a purchase go into escrow this morning where the buyer negotiated a $25,000 credit from the seller toward closing costs. That lets me buy their rate down a bit and cover some of the remaining costs. We would never have seen a credit like that in 2020 or 2021 — people were overpaying for the home, getting no credits toward closing, and weren't even allowed an appraisal contingency to make sure the home was worth what they were paying. No inspection contingencies either. It was an absolute mess. If inventory stays where it is and rates drop, we go right back to that. If inventory picks up too, I still think we're going to be very busy, but maybe not as crazy. Either way, right now is a fabulous time to negotiate with a seller.

Shop the lender now, shop the refinance later

Back to the article: it notes that some lenders may also use unclear terms in the agreement that could result in hidden fees or costs rolled into the loan, affecting long-term interest payments.

So you've got all these different people saying the same thing: don't pick a lender based on the package deal for later. Shop for the right lender. Work with somebody you're comfortable with. Get the deal you're looking for. And when it's the right time to refinance down the road, that's when you start your search again — who's got the best rates now, who's got the best closing costs now. Do your research and pick based on today's scenario.

And there's one more failure mode. Even if they are offering you a free refinance later, you still have to qualify for it. What if something happens between now and then? You bought the home, a pipe breaks, you open a new credit card to pay the plumber to repipe the house. Life happens. Something you could never have foreseen comes up as an expense you didn't plan for. Somebody ends up in the hospital, somebody gets sick. Now your credit score has dropped, your debt balances are higher, maybe you missed a payment. If you can't credit-qualify for the refinance, you can't get the refinance. Just because it's free doesn't mean you don't have to qualify for it.

So do your homework. Research the lender you want to work with. Who's honest? Whose relationship do you like? Who's giving you the information you need through the process? Who's actually competitive on rate? Don't worry about later. Make sure you're qualifying for what you can afford, buying what you can afford, and anticipating making that payment for the whole time you stay in the property. And when rates drop — which they eventually will, though nobody can say when — then we go ahead and get you a better rate, a better payment, and more cash flow.

Q&A: why do some people dislike escrow impound accounts?

Michael says his property taxes are included in his monthly payment and it works well for him, but other people he's spoken to don't like that idea, and he wants to know why.

A lot of people do it that way, and I think it's a fabulous way to go. Nobody likes to be surprised by a tax bill — some states and counties bill twice a year, some three or four times, some once a year, but either way it shows up in the mail and suddenly you have to write a big check. When it's included in the monthly payment, it's part of the balance you've already budgeted for, and when the bill is due the mortgage company pays it for you. Many people include their homeowners insurance the same way, and that policy is due once a year, so when the bill arrives they don't have to think about it at all.

As for why some people don't like it: I think there's a belief that the bank is taking that money and making something on it. Your taxes are, let's say, $500 a month. The bank takes it, sets it aside, next month there's $1,000 in there, then $1,500 — and in their mind the bank is earning interest on it or investing it. They feel that if they controlled that money, they'd be the ones earning on it.

A bank is not allowed to put your escrow money into an interest-bearing account. Escrow accounts and impound accounts are the same thing, and it is a separate account set up for your loan, under your loan number, for you. The money goes in, it sits, it doesn't earn interest, and it isn't making the bank any money. It's truly just making your life easier. Maybe way back in the day banks could gamble a little with that money, but with all the rules and restrictions that have come out since, including the CFPB, that's not something banks are allowed to do.

So choose what works for you. If you're a commissioned employee getting big commissions monthly or quarterly, or an annual bonus, it may be easier for you to make the principal-and-interest payment and pay the big bills when the bonus lands. That works for some borrowers. If you're salaried or hourly, with stable month-to-month income and no bonuses, it is absolutely not fun to get the property tax bill in the mail and have to write that check. I personally like it impounded. You make that payment every month knowing you've covered your entire house bill — principal, interest, taxes, and insurance — and when the bills come due, you have nothing to worry about.

Wrap-up

That's the show for this week. One thing before I go: a listener asked a while back for a show on lis pendens, and I don't know that I can fill 30 minutes on it, but I'll bring it up next week and explain what it is and how it works, because it's a great topic. And if any of you have a subject you'd like me to cover, go to mortgagemomradio.com and click contact — it emails me directly. My goal is to bring you the information you're actually looking for.

If you want to know when I go live, text the word LIVE to 844-935-3634 — one text a week with the topic and a link to join, no spam. That's also the office number if you'd like to talk with me or the team. At mortgagemomradio.com you'll find the calculators, the weekly newsletter, the podcast archive, and a way to submit questions for the next live show. I'll be back next Wednesday. Talk to you all real soon.