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A “buy now, refinance for free later” mortgage could potentially save borrowers thousands of dollars.
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More lenders are offering “buy now, refinance for free later” mortgage deals to attract new borrowers.
If rates go down in a few years, you could potentially lower your monthly mortgage payment with no out-of-pocket costs.
Some lenders offer better deals than others, so be sure to read the fine print.
As mortgage rates have skyrocketed and the pool of buyers willing to take on decades-high rates has shrunk, mortgage lenders are looking for new and innovative ways to attract borrowers.
An increasing number of lenders are now offering a new type of deal on their mortgages where home shoppers can buy a house now at current rates, then refinance for free when rates drop. While this can help borrowers lower their monthly payments without having to spend thousands of dollars on refinance closing costs, not all of these deals are equal, and there are some pitfalls to watch out for.
So how exactly do these BOGO-style mortgage deals work, and are there any downside to them? Here’s everything you need to know.
Why are lenders offering ‘buy now, refinance for free later’ mortgages?
“There’s really two aspects of this. One is to unlock buyers who are on the sidelines right now,” says Dan Richards, executive vice president of Flyhomes Mortgage, a Seattle-based mortgage lender that’s releasing its own “buy now, refinance for free later” product in January. “Secondly, it endears these borrowers to become long-term customers of Flyhomes.”
Mortgage rates have increased by more than three percentage points in 2022, hurting affordability and pushing many buyers out of the market. The median monthly mortgage payment for conventional loan applicants in October was $2,047. A year ago, it was $1,431, according to the Mortgage Bankers Association.
Because of how expensive it’s become to get a mortgage, existing home sales are down 28.4% year-over-year, the National Association of Realtors reported in November. This has mortgage lenders struggling to find potential customers. Promising a free refinance down the road can help nudge hesitant buyers back onto the market.
How do these mortgages work?
With a “buy now, refinance later” deal, the lender agrees to waive or pay for some or all of the borrower’s refinance closing costs. Some lenders only waive their own lender fees with these deals, while others will also cover third-party costs, such as appraisal fees. Some may simply roll your closing costs into the loan amount.
In addition to Flyhomes’ soon-to-be-launched deal, which covers all closing costs, including third-party fees, a few other lenders have joined in the trend. Guild Mortgage has its Payment Protection Program, which guarantees a refinance with no lender fees. Better’s Buying Guarantee will cover the cost of refinancing with up to $3,500 in lender credits to cover third-party costs (Better doesn’t charge any lender fees), and Amplify Credit Union is offering a refinance deal with “zero costs or appraisal fees,” according to its website.
Keep in mind that to take advantage of a “buy now, refinance later” deal, you’ll need to refinance with the same lender you got your original mortgage with. You may need to wait at least six months before you’re eligible to refinance.
Benefits of ‘buy now, refinance later’
Provided they meet the requirements to get a loan, borrowers always have the option to refinance when rates drop, so a high rate isn’t necessarily permanent. But refinancing isn’t free — often, it can cost at least a couple thousand dollars.
Depending on the lender and average closing costs in their area, a “buy now, refinance later” deal could save borrowers a lot of money, both at closing and each month with a lower monthly mortgage payment.
Though it’s impossible to know exactly where mortgage rates will be in the coming years, Richards says that this type of deal is beneficial no matter how rates trend.
“If rates continue to go up, you won from that standpoint because you’ve locked in a relatively lower rate if rates continue to go up, and you’re in a home, right?” Richards says. “If they go down from here, it’s a win. Because you can come back and refinance at no cost.”
Even if rates stay flat, borrowers still benefit because they’re building equity in their home through price appreciation, he adds.
Pitfalls to watch out for
One major potential pitfall is that every lender has different rules for how their “buy now, refinance later” products work. If you’re considering one, be sure to read the fine print.
Some lenders, for example, may use unclear language to make it sound like they’re covering all your costs, when in reality you still have to pay third-party fees, or the closing costs are being rolled into your loan balance. When closing costs are rolled into the loan, it saves you money up front, but you’re covering that cash with the loan, meaning you’ll have to pay it back with interest.
You should also pay attention to the lender’s deadline for refinancing. Guild says that borrowers have until December 2025 to get their lender-fee-free refinance, while Flyhomes doesn’t have a deadline.
If the lender only offers a short window for you to refinance, and rates don’t drop within that time frame, you’ll have missed your chance.
You’ll also have to work with the lender you got your original loan with, which means you’ll be limited in terms of the rates available to you. If your goal with refinancing is to reduce your monthly payment as much as possible, shopping around with multiple lenders could be a better move.
Along with that, the lender offering the “buy now, refinance later” could end up charging you a slightly higher rate to help pay for the refinance. When the time comes, getting quotes from a few other lenders can help you get an idea of whether you’re being charged more for your “free” refinance.
Even with a truly no-cost refinance, you’ll still likely need to bring some cash to closing to prepay into the escrow account that covers your taxes and homeowners insurance.
Finally, there’s the possibility that you could be ineligible for a refinance when rates drop. Home prices have started to drop somewhat, and some predictions say prices have room to fall as much as 20%. However, with housing supply at historic lows, many believe prices will only decrease slightly.
If prices do drop significantly and your home appraises for less than what you purchased it for, you likely won’t qualify to refinance.
If you’re considering a “buy now, refinance for free” mortgage, it’s important to consider not only the specifics of the product you’re considering, but the macroeconomic conditions that could affect your ability to refinance, too.