Lately, some mortgage lenders have pitched “buy now, refinance for free” offers to get more home buyers to take the plunge.
The thinking is mortgage rates will be lower in the near future. And when that time comes, you won’t have to pay any lender fees.
This can even sway the decision to buy a home, assuming you’re on the fence about renting vs. buying because it feels too expensive today.
These offers sound like a win-win for the home buyer, as they’ll get a lower interest rate and potentially avoid thousands in closing costs.
But there are quite a few issues with this line of thinking that are worth discussing.
Nobody Knows If Mortgage Rates Will Rise or Fall
Last I checked, mortgage rate predictions have been a tough game. Prior to early 2022, mortgage rates defied the forecasts.
While most expected them to rise, they hit fresh all-time lows and stayed at those levels for much longer than expected.
Then the Fed announced an end to it Quantitative Easing (QE) program and the start of Quantitative Tightening (QT), which sent shockwaves through the mortgage market.
Accompanied by 11 Fed rate hikes, the 30-year fixed surged from around 3% in January 2022 to as high as 8% in October 2023.
Once again, no one expected this, and most predictions called for improvements in 2023 after a rough 2022.
Instead, mortgage rates climbed even higher, leading to the lowest mortgage demand in decades.
People stopped buying homes and virtually nobody refinanced their mortgage. Even worse, existing owners won’t sell because they don’t want to lose their ultra-low interest rate.
This so-called mortgage rate lock-in effect has stifled inventory, which was already low to begin with.
It also partially explains why home prices remain so high, in spite of much more expensive mortgage rates. There’s no supply.
To entice buyers, some real estate agents and mortgage lenders have pitched the phrase, marry the house, date the rate.
The logic is you can still buy your forever home today, while mortgage rates are high. But refinance that pesky high mortgage rate once they fall again.
Problem is they haven’t fallen. And those predictions didn’t pan out. At least not yet.
Speaking of, take a look at the 2024 mortgage rate predictions if you think they’ll be of any use.
Mortgage Rates Are About 1% Below Their Recent Peak
Over the past month and change, the 30-year fixed has come down about one percentage point.
It surpassed 8% in mid-October before falling precipitously, thanks to favorable economic data.
Several reports hinted at possible weakness in the economy, pushing bond yields down from their recent highs while mortgage rates followed.
At the same time, the Fed is expected to cut rates several times in 2024 as the economy cools.
The thought is inflation has peaked, and restrictive monetary policy can ease somewhat.
This is all good news for mortgage rates, which tend to fall when inflation is low, or when the economy is showing signs of weakness.
But there’s still no guarantee mortgage rates will come down. Nor is there a guarantee they’ll fall by an amount necessary to make a refinance worthwhile.
I don’t subscribe to a refinance rule of thumb, but generally you’d want an interest rate at least 1% below your current rate for it to be worth it.
Once you factor in the closing costs, you’ll need to realize some decent monthly payment savings to make it worthwhile. And to break even on those upfront costs.
These ‘Refinance for Free Later’ Deals Have Some Issues
- Will mortgage rates fall enough in the future to make the refinance work?
- Will this lender still be in business and agree to the terms of the deal?
- Will anything change that limits your ability to refinance (credit score, property value, etc.)
- What if a different lender has a lower rate in the future?
- Could this type of offer pressure you into buying a home today if you’re unsure or not ready?
To make a refinance more compelling, or at least easier to pencil, some mortgage lenders are offering a free one in the future if you use them for a home purchase loan.
It seems like a no-brainer. Why not take them up on the deal, right? Well, there are myriad issues with these types of offers.
For one, you have to use the same lender twice. And you have to use the lender offering the free refinance deal to begin with.
So their “refinance for free” deal might stop you from shopping your rate with other banks, lenders, brokers, etc.
The next problem is this lender might not even be in business once it comes time to refinance. Trust me, many lenders have closed their doors as business has dried up.
And if you do use them again in the future, you’ll need to hope they have the lowest rate compared to other lenders. What are the chances of that?
Then there is the pesky issue of mortgage rates. Remember, nobody is very good at predicting them.
Sure, they could drop. But they might not. Or they may not fall enough to make the refinance worthwhile.
At the same time, you’ll need to qualify for the refinance. What if home prices fall between now and then, and you’ve got negative equity to deal with?
Or something else comes up that limits your ability to refinance? Perhaps a lower FICO score, a gap in employment, etc.
Ultimately, you’re probably better off going with the lowest combination of rate and fees you come across today.
And if and when the time comes to refinance in the future, do the same exact thing. Look for the best deal in front of you.
There are simply too many variables and unknowns to bank on a free refinance in the future.