Lenders get creative: Will 'buy now, refinance later' revive the housing market?

With home sales falling to 13-year lows, lenders are pulling out all the stops to lure buyers back into the market.

According to The Wall Street Journal, there’s a growing trend of financing deals that offer credit with a pledge to refinance in the future at no additional cost.

For example, Amplify Credit Union in Texas offers a free mortgage refinancing program within 24 months of purchasing a home. Ohio-based CrossCountry Mortgage offers a $1,500 lender credit that could be put toward refinancing.

Meanwhile, Guild Mortgage, which operates more than 70 offices across the U.S., has launched a payment protection program that waives the refinance fee.

While the fine print on these programs varies, they all provide a pathway for locking in a lower mortgage rate without having to pay most or any of the closing costs.

Mortgage refinancing costs typically run between 2-3% of the loan amount, with some estimates showing up to 6%. No-fee refinancing sounds alluring, but it’s not without its complications.

The hidden cost of “free” refinancing

With "buy now, refinance later" mortgages, it pays to read the fine print.

According to Bradley Hilton, an Atlanta-based financial planner, these programs typically have higher initial fees or interest rates, which allow the lender to make most of their money before the homeowner refinances.

And when they refinance, they’ll likely have to pay the appraisal fee even if they stick with the same lender.

Additional costs can also add up, especially if the homeowner prolongs the term of their mortgage. In this case, the monthly mortgage payment is lower, but they’ll have to pay interest over a much longer period of time.

Even when rates drop, there’s no guarantee that the homeowner can refinance at the lowest available rates. Instead, they’re often beholden to whatever their lender offers, according to Bankrate analyst Ted Rossman.

The real reason these programs exist

Lenders are offering "buy now, refinance later" deals because they see the writing on the wall: America’s housing market is frozen, and it could take years before the industry begins to thaw.

According to the National Association of Realtors (NAR), the sale of existing homes—which account for roughly 88% of the housing market—fell in September to the lowest levels since October 2010.

Lawrence Yun, NAR’s chief economist, said the market has been worse than the trade group predicted.

“We thought at the beginning of the year that sales would be down 10% or 15% for the year,” he said. “It will be more like 20% from last year.”

With "buy now, refinance later" mortgages, lenders are trying to “unlock buyers who are on the sidelines right now,” Dan Richards, executive vice president of Flyhomes Mortgages, told Business Insider.

Such a program also “endears these borrowers to become long-term customers” of their lenders, he added.

In other words, lenders aren’t seeing much foot traffic from potential borrowers and are dangling a carrot, hoping they’ll bite.

High barrier to entry

To be able to refinance later, consumers still need to buy now with mortgage rates at 23-year highs.

Data from Freddie Mac shows that 30-year mortgage rates have risen relentlessly since the spring. In fact, they have more than doubled since the Fed began raising interest rates in March 2022.

Unless homebuyers have a sizable down payment, experts say buying doesn’t make much sense today. Case in point: Mortgage affordability relative to the average rent is now the worst on record.

Strategists say mortgage rates will eventually come down, but it won’t be the relief that homeowners need.

Goldman Sachs’ managing director Roger Ashworth believes mortgage rates will land at 6.8% by the end of next year, much higher than his previous forecast of 5.9%.

Meanwhile, Kelly Miskunas, head of capital markets at online mortgage company Better, told CBS News: "We would expect mortgage rates to be closer to 6.5% in 2025 than the current rate of 8%."