Here's What Happens When You Don't Question 'Free' Refinance Offers

However you slice it, it's just not the most ideal time to be an aspiring home buyer. Inventory is limited, which makes sense when you consider the current mortgage rates -- as of this writing, the average for a 30-year fixed loan is 7.29%, according to Freddie Mac. At the beginning of 2022, you could've gotten that same loan at 3.22%. A ton of homeowners who bought in the pandemic-fueled frenzy of 2020 and 2021 when rates plummeted are reluctant to give up their cheap mortgage loans, leaving buyers without much home inventory to choose from.

But let's say that you're intending to grit your teeth and buy a home in the near future, regardless of how rates look. I'm in this boat, too -- I've spent more than a year saving for a down payment and a home emergency fund, and am growing steadily more tired of renting. Some mortgage lenders are offering what sounds like a pretty sweet deal: a buy-now-free-refinance-later mortgage loan. This gets you in a home now, and you can swap your loan for a cheaper one later. When I first heard about this phenomenon, it sounded attractive to me, too. But what happens when you go for one of these? Let's find out.

You'll still pay some fees

The odds of that "free" refinance actually being free are low. Sorry to burst your bubble, but I had to say that right upfront. The reason for this is simple: Not all the fees you pay for a standard mortgage refinance are charged directly by your lender.

There are also third-party refinancing fees involved, such as those paid to the appraiser who ensures the home is worth enough to secure the refinance. Your lender may cut you a break on some of its own processing and credit-check fees (although, as noted by Experian, the fees may only be capped, not eliminated entirely). But you're still probably going to have to cough up some money to swap your old mortgage for a new one.

You may not appreciably lower your mortgage rate

Another potential issue with a "free" refinance included by your mortgage lender when you buy a home is that you might be required to refinance within a certain period of time. And as we say so often around here, none of us has a crystal ball to see how mortgage rates will change in the future. If you're required to take advantage of the refinance offer within, say, two years, who's to say rates will be lower?

Some of the biggest names in the business do have predictions, and some of them are encouraging. For example, the National Association of Realtors' October 2023 Economic Outlook data suggests we could have mortgage rates under 7% by the middle of 2024, and possibly even as low as 6.3% by the end of 2024. So that's something to hope for. But it's definitely not a guarantee. And if rates aren't lower by the time the clock runs out on your "free" refinance, you might have to forgo it -- and pay for a refinance later on down the line.

How can you cope with higher rates?

While we have seen some slightly lower rates these last few weeks, they're still above 7%. Personally, I'm resigned to paying a higher rate than I'd like when I buy in 2024, but there are some moves you can consider to get the lowest rate possible for the time, whenever you decide to buy.

• Focus on your credit score: Your credit score is a major factor in determining how much you'll pay to borrow for a home purchase, so now is the time to make it sparkle. Get a copy of your credit report (AnnualCreditReport.com) and check for errors that could be dragging your score down. And pay down some existing debt, if you can -- doing this boosted my credit score by 100 points in less than a year.
• Talk to a range of lenders: Different mortgage lenders have different rates and different mortgage programs, so take the time to talk to a handful of them and see what rate you'll be offered. Resist the urge to go with the first one you investigate.
• Pad your down payment: Depending on where you're buying, a 20% down payment may not be feasible for you, but it's good to put some amount of money down on a home if you can. It'll reduce the amount you're borrowing (meaning a lower monthly payment), give you more equity in your home right away, and make you a more attractive buyer to lenders and home sellers alike.
• Consider an adjustable-rate mortgage: ARMs can be a gamble, but it is a good way to start off your mortgage term with a lower rate. Ideally, rates will fall during the initial fixed-interest period of your loan (often five or seven years) and you can refinance it then.

There is no free lunch -- and "free" refinancing offers are similarly dubious. Do your homework, read the fine print, and take the above steps to make yourself a better borrower, even in this time of higher mortgage rates.