2 Ways to Ensure Your Free Mortgage Refinance Actually Saves You Money

Mortgage refinances were popular in 2020 and 2021 when lenders were offering up record-low rates to borrowers. But these days, refinance activity is down, and it's largely because mortgage rates have been so high since the start of the year.

Refinance activity was 7% lower for the week ending Nov. 3, 2023, than it was a year ago, says the Mortgage Bankers Association. And that's not surprising given that the average mortgage rate as of Nov. 9 was 7.5%, according to Freddie Mac.

But you still may be interested in refinancing your mortgage if you can do so at zero cost. Mortgage lenders have traditionally offered no-cost refinances to borrowers, and some are doing that today to drum up refinances in the midst of a slow streak.

But if you're going to take advantage of a free mortgage refinance, you'll need to make sure it's really worth it. Here's how to ensure that going this route will actually save you money.

1. Make sure you're not swapping a no-cost refinance for a higher rate

Mortgage lenders that offer no-cost refinancing tend to make up for it in the form of higher interest rates. So if you're interested in a free refinance, compare the rate you'll be getting to the rate you're offered by lenders that will charge you some closing costs. And then, do a comparison.

It may be that $3,000 in closing costs results in $100 in monthly mortgage savings, whereas $0 in closing costs only gives you $50 in monthly mortgage savings. If you plan to be in your home for a long time, the first offer might be your better choice even if you end up having to spend some money upfront on closing costs.

2. Make sure there's a reason for refinancing your mortgage at a time when rates are high

A no-cost refinance can be very appealing at a time when borrowing rates are low. But right now, that's not the case. If you're going to pursue a no-cost refinance, you'll need to make sure there's a good reason to do so.

It's the same concept as not rushing to buy an item at a store simply because it's got a huge markdown. If a $100 kitchen gadget that normally sells for $99.99 is marked down to $29.99, you may be tempted to buy it and save $70. But if you don't need that gadget and won't ever use it, you won't save $70 -- you'll waste $30.

Similarly, don't just rush into a mortgage refinance because there are no closing costs involved. Instead, make sure you stand to benefit financially.

Perhaps you owe a lot of money in high-interest debt. Doing a cash-out refinance could help you pay off that debt in a more affordable manner even if you end up with a higher mortgage rate than what you locked in originally. But run those numbers to make sure (rather than assume) that you should sign a new mortgage simply because you can do so for free.

A no-cost mortgage refinance may or may not be a good idea for you right now. Take the time to think through that decision and compare alternative offers before making your choice.