Lenders Offer Buy Now, Refinance Later Free—What’s the Catch?

Mortgage rates have soared over the past year and now stand at 7.79% for a 30-year fixed-rate mortgage, per Freddie Mac. Amid the skyrocketing rates, many would-be buyers have been priced out, and the housing market has experienced a decline from the competitive market seen for much of 2021 and 2022.

Now, lenders have a proposition for those deterred by the nearly 8% rates — buy the house now, and refinance later at no cost.

Typically, under a “buy now, refinance later at no cost” deal, buyers are given the option to refinance their mortgage if rates decrease, without bearing a significant portion of the closing costs — which were an average of $2,375 in 2021, according to Closing Corp, per The Wall Street Journal.

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 fees or roll the costs into the loan.

Related: High Mortgage Rates Are Fueling Record Housing Pessimism—So Why Are Experts Saying Now Is the Time to Buy?

While the offer may seem enticing, there are caveats.

“Nothing is free,” Bradley Hilton, a financial planner in Atlanta, told the WSJ.

For example, some of the offers possess time restraints and short expiration dates, resulting in no real savings as failing to refinance within the timeframe means missing out on the deal and potentially incurring full closing costs out of pocket, Investopedia notes. Also, if the lender’s credits expire after a year or two, they may lose their value if rates don’t decrease within that period, making refinancing unfeasible.

Instead of taking a “refinance free” deal now, opting for the lowest mortgage rate available without strings attached and later searching for the most competitive refinancing deal may actually yield more savings down the line, Bankrate analyst Ted Rossman told the WSJ.

Plus, 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 to refinance. If credit deteriorates or the property’s value significantly drops, one may not be able to refinance later as they hoped, Laurie Goodman, a fellow at the think tank Urban Institute, told WSJ.

Related: ‘Everybody’s Scared’: Barbara Corcoran Says Now Is the ‘Very Best Time to Buy a House’ — Here’s Why

Some lenders may also use unclear terms in the agreement that could result in hidden fees or costs rolled into the loan, impacting long-term interest payments, Business Insider reported.

Furthermore, to benefit from the “buy now, refinance later” deal, borrowers must refinance with the same lender and may need to wait at least six months to be eligible. Such restrictions to work with the original lender may also limit the borrower’s ability to access better rates elsewhere.

“There’s really two aspects of [buy now, refinance later]. One is to unlock buyers who are on the sidelines right now,” Dan Richards, executive vice president of mortgage lender Flyhomes Mortgage which began offering a “buy now, refinance for free later” product in January, told Insider. “Secondly, it endears these borrowers to become long-term customers of Flyhomes.”

So, what’s one to do? Rossman told the WSJ that he recommends focusing on what you can afford at the time you’re looking to buy, rather than banking on future rate drops, because “sometimes things don’t go according to plan.”

Related: Zillow Launches 1% Down Payment Mortgage Program Amid Housing Affordability Crisis