Are ‘buy now, refinance for free later’ mortgage deals too good to be true?

(NEXSTAR) – Some lenders are getting creative and offering free refinancing to buyers willing to take the leap and purchase a house amid America’s crushing combination of lofty home prices and high mortgage rates.

The selling point? It can be summed up by the real estate slogan that seems like it was created for 2023: “marry the house, date the rate.”

Essentially, fall in love with your home, but remember that you can break up with your costly mortgage rate when you find a lower one in the future.

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Mortgage rates retreated some in November but are still historically high, with the average rate on a 30-year fixed-rate mortgage at 7.22% as of Thursday, according to Freddie Mac. The last time they were this high was two decades ago.

Current conditions have created an incentive for lenders to find new ways of attracting buyers and driving business as demand stagnates. The sale of previously owned homes tumbled to a 13-year low in October, according to the National Association of Realtors.

Is there a downside for home buyers?

For someone ready to buy a home, it might seem only logical to lock in a free, future refinance deal – but there are some things to keep in mind.

First, it’s important to keep in mind that there is no guarantee rates will drop any time soon. Furthermore, if the housing values fall and the dollar amount of your loan is higher than the market value of the house, the lender might require cash to offset the negative equity.

Buyers should make the decision – a monumental one for many people – based on the finances they have now, and even if they do refinance in the future, they should still feel comfortable making payments at today’s rates, National Association of Realtors Deputy Chief Economist and Vice President of Research Jessica Lautz told Nexstar.

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“Rates may lower, and this could provide an opportunity for monthly savings, but it may depend on how long the homeowner plans to own the home and the closing costs of the refinance if this is the best financial move for them at the time,” Lautz said.

Real estate investor Brad Smotherman advises buyers to make sure they’re working with a reputable company, because the financing process comes with stacks of paperwork that can easily hide crucial details.

While many buyers are eager to avoid the fees usually associated with refinancing – often between 2 and 6 percent of the loan principal – a “free” refinance may not completely rid them of the cost.

“Let’s say that market rates go down to 6 1/2, they may offer you a 6.75% refinance for free,” Smotherman said. “But what they’re doing is they’re buying the rate up … what they’re doing is they’re baking in the cost into the rate and then selling the loan generally, and making more money on the backside of the loan.”

You’ll want to find out how the deal actually works, and maybe compare it to others. Is the lender just waiving their own fees or covering appraisal and other third-party costs? Will the “no closing-cost” fees end up rolled into the loan amount?

Finally, take a close look to see if the deal has an expiration date by which you must refinance or lose option to refinance for free.

If you do find a good “buy now, refinance later” deal, however, you can feel pretty good about whatever happens with mortgage rates in the future, Dan Richards, executive vice president of Seattle-based Flyhomes Mortgage told Insider.

“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.”

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