Refinancing your mortgage can be a great way to lower your monthly payments or interest rates. But lately, you’ve likely seen lenders offering what they call free refinances.

It sounds enticing, but are these offers truly free? Let’s break down how “free” refinance offers work, what you’re really paying for, and whether these “deals” are worth it.

Understanding Par Rates and Mortgage Refinancing

Whenever you take out a mortgage, you receive a rate called the “par rate.” This rate has no points or credits and reflects the lender’s cost of funds plus their desired profit margin.

When you refinance, lenders can tweak this rate, either by offering credit toward your closing costs (in exchange for a higher interest rate) or by allowing you to pay points to secure a lower rate.

If you see an offer for a “free” refinance, it usually means the lender is offering to cover the closing costs by charging you a slightly higher interest rate.

You’ll pay less out of pocket upfront, but your long-term costs could increase.

The Real Costs Behind “Free” Refinance Offers

No-Cost Refinances: What They Really Mean

A no-cost refinance doesn’t mean the lender is footing the bill. In reality, the costs are either rolled into the loan or baked into a higher interest rate.

This is why “free” refinances are somewhat of a misnomer—they shift when and how you pay, but you’re still paying.

Lenders may waive their origination fees, but third-party costs (like appraisal and title fees) are often still required.

So, while the upfront costs are lower, the long-term price could be higher due to increased interest over the life of the loan.

How Lenders Structure “Free” Refinances

When lenders offer a no-cost refinance, they do so by offering a higher interest rate or adding the closing costs into your new loan amount. Either way, you end up paying for it:

• Higher Interest Rate: This increases your monthly payment and the total interest paid over time.
• Rolled-In Closing Costs: Adding these costs to your loan increases your balance and monthly payments, which can impact your home equity.

The True Costs of a No-Cost Refinance

Impact on Interest Rates and Monthly Payments

Choosing a higher interest rate to avoid closing costs might feel like a win initially, but it can cost you more over time.

For example, refinancing a $200,000 mortgage at a higher rate to avoid $5,000 in upfront costs could result in paying thousands more in interest over the loan’s lifetime.

Breakdown of Common Closing Costs

Typical refinance closing costs range from 3% to 6% of the loan amount and include fees like:

• Loan Origination
• Appraisal Fee
• Title Insurance
• Credit Report Fee
• Mortgage Insurance

Debunking Common Myths About “Free” Refinances

Myth 1: “Free” Refinances Are a Special Deal

Many lenders offer “free” or “No Closing Cost” refinance options. It’s not an exclusive deal reserved for special clients, though it may be marketed that way.

Most financial institutions allow borrowers to structure their refinance this way—it’s just a matter of how the costs are paid.

Myth 2: You Can Easily Refinance Without Hassle

A refinance isn’t a simple “push-button, get lower rate” situation. You’ll still need to be re-underwritten, which includes a review of your credit, income, and debt.

If your financial situation has changed, you may not qualify as easily as before.

Pros and Cons of “Free” Refinancing

Pros

• Lower upfront costs: Especially useful if you don’t have the cash to pay closing costs now.
• Short-term savings: If you’re selling or moving in a few years, the higher long-term costs might not affect you.

Cons

• Higher overall costs: You’ll pay more in interest over time.
• Reduced equity: Rolling closing costs into your loan increases the loan balance, which means less equity.

When Does a No-Cost Refinance Make Sense?

Short-Term Homeowners

If you plan to sell your home within five years, a no-cost refinance can be beneficial. You’ll avoid the upfront closing costs and potentially sell before the higher interest rate significantly affects your total payments.

Long-Term Homeowners

For those planning to stay in their home for the long haul, paying the closing costs upfront makes more sense. Over time, the lower interest rate will save you more money than opting for a no-cost refinance.

TL;DR:

There’s no such thing as a truly “free” refinance. While no-cost refinances reduce your upfront expenses, the costs are built into your loan through higher interest rates or added to your loan balance.

These options can make sense if you’re planning to stay in your home for a short time, but if you’re in for the long haul, you’re likely better off paying the closing costs upfront. A

lways evaluate your financial situation and goals before choosing a no-cost refinance option.

Hope this helps!

FAQ on “Free” Refinancing

Q: Is a “free” refinance truly free?
A: No, “free” refinances either come with a higher interest rate or added loan balance, meaning you pay more over time.

Q: What’s the difference between a no-cost refinance and a traditional refinance?
A: With a no-cost refinance, the lender covers closing costs upfront, but you pay more through higher interest rates or rolled-in costs. A traditional refinance requires you to pay closing costs at the time of refinancing but offers lower long-term payments.

Q: When should I consider a no-cost refinance?
A: It’s a good option if you plan to sell your home within five years or need to save on upfront costs. For long-term homeowners, paying closing costs upfront generally results in more savings.

Q: Will my monthly payments increase with a no-cost refinance?
A: Yes, if the closing costs are rolled into the loan balance or if you’re offered a higher interest rate, your monthly payments will likely increase.