Thinking of buying now and refinancing your mortgage later? Here's what to consider

Mortgage rates have started to backtrack from the 23-year-high seen in mid-October 2023. Gambling that they'll continue to decline, many recent homeowners are buying the home they want today and assuming they'll get a more manageable mortgage rate down the road.

"Buy now, refinance later" has become a popular path to homeownership in recent years: Of the buyers who took out mortgages between September 2022 and September 2023, 84% said they plan to refinance, according to a U.S. News survey conducted between Sept. 1 and Sept. 7, 2023.

Nearly the same share (82%) said they were told they wouldn't have a problem refinancing later, mostly by real estate agents and mortgage loan officers.

With many analysts expecting rates to dip even further in 2024, it's an attractive gambit. But it's not without risks, including foreclosure. In the US News poll, 16% of respondents with an adjustable-rate mortgage (ARM) and 13% with a fixed-rate mortgage said they wouldn't be able to keep up with their payments if they couldn't refinance.

Jessica Lautz, deputy chief economist at the National Realtor Association of Realtors, said buyers considering the strategy should be comfortable with the mortgage they signed up for, "if rates for some unexpected reason, stay flat or do not drop further."

"I would say, for a buyer moving forward, refinancing could be looked at as the icing on the cake," Lautz said.

If you're thinking about buying now and refinancing later, it's important to understand the risks, rewards and which type of mortgage to take out.

There are several approaches to buying now and refinancing later. Consider the interest rate environment and your circumstances and go with the strategy that offers the most flexibility and costs you the least.

Start with an ARM, refinance with a fixed-rate mortgage

Adjustable rate mortgages start with a fixed "teaser" rate for the first five to ten years of the loan term and then fluctuate according to market conditions. 

Pros: The teaser rate on an ARM is usually better than a fixed-rate mortgage.

Cons: If you're unable to refinance, you could be stuck with a mortgage that's susceptible to market conditions.

Chase Bank offers ARMS with terms that range from 10 to 30 years and fixed rates for the first five, seven or ten years. The Chase DreamMaker mortgage enables qualified first-time homebuyers to pay as little as 3% of their home's value as a down payment.

Ally Bank customers can also get approved for as little as 3% down, and there are ARMs with loan terms ranging from 15 to 30 years. Though Ally emerged as an online-only bank in 2009, it was founded as General Motors' auto-financing division back in 1919.

Start with a fixed-rate mortgage, refinance with a fixed-rate mortgage

Another option is taking out a fixed-rate mortgage and refinancing later with another fixed-rate loan. This could be an attractive option if mortgage rates are expected to climb.

Pros: Since your rate won't fluctuate, you can predict what your payments will be.

Cons: Your rate will most likely be higher than the teaser rate on an ARM. And if interest rates continue to decline, you'll be stuck paying more than you had to.

Rocket Mortgage offers fixed-rate loans, including conventional mortgages, FHA loans, VA loans and jumbo loans. It has products for borrowers with credit scores as low as 580, which is well below the industry standard. Rocket is completely online and available in all 50 states and the District of Columbia.

Start with a fixed-rate mortgage, refinance with an ARM

If you sign up for a fixed-rate mortgage in a high-rate environment and see rates fall, you might want to refinance to an adjustable rate to take advantage of the decline during your loan's teaser period.

In theory, this could work out in your favor if you plan to sell your home in a few years or if you expect to have improved finances. It's the riskiest of these approaches, however, because you're betting that mortgage rates will continue to decline. If rates go up, you'll be stuck paying more.

Pros: You may be able to secure a lower rate during the initial period.

Cons: Rate markets are unpredictable and you may end up paying more after your teaser period.

If you're jumping on the trend, there are some important considerations.

Make sure you can afford your current rate

Buying with the goal of refinancing is taking a gamble on mortgage rates, which comes with a certain amount of risk. There's a lot of expectation that rates will continue to decline, but those predictions could always be wrong.

You could also have an unexpected change in income or credit that would make you a bad candidate for refinancing.

If you couldn't get the lower rate you expected, could you afford your monthly mortgage payments? Falling behind could mean your credit score taking a hit, a lien on your property or even going into foreclosure.

"We want to make sure that everyone is in a position where they feel comfortable with their finances as they are," before they refinance, Lautz said.

Shop around for the best refinancing terms

If owning a home is worth the risk for you, start your search broadly and consider many options before choosing a refinancing plan.

"Most people don't go into a car lot and take the first one they see," said Valerie Saunders, president of the National Association of Mortgage Brokers. "Usually, you want a certain color, you want a certain style. It's the same thing here — don't just pick the first thing. Ask for multiple estimates before you decide [to refinance]."

PNC offers both fixed and adjustable-rate loans, including FHA. VA and jumbo mortgages. PNC's fixed-rate terms range from 10 to 30 years, while the teaser period on its adjustable-rate refinance loans ranges from seven to ten years.

SoFi offers competitive mortgage refinance loans with terms ranging from 10 to 30 years. Borrowers with a SoFi checking or savings account can save $500 on closing costs, making it CNBC Select's top choice for saving money.

Remember to factor in closing costs

Refinancing comes with some expenses: The average closing cost on refinancing a mortgage is approximately $5,000, according to Freddie Mac, though your location and the size of the mortgage will influence your specific costs. In general, borrowers should expect to pay between 2% and 6% of the principal loan in closing costs.

Think twice about "buy now, refinance for free" mortgages

Some mortgage providers hoping to attract refinancers are offering package deals: Take out a mortgage with them now and they'll give you a credit for closing costs when you refinance with them later when rates go down.

While this may seem like a no-brainer, you could end up paying more in the long run. "Buy now, refinance for free" deals don't always cover all closing costs. In some cases, the fees are just added to your loan rate. You may also be given a limited amount of time to refinance before the credit evaporates.

Read the fine print, ask a lot of questions and look at other plans before signing up.

"Nothing is for free," Saunders said. "When you see a no-closing-cost refinancing loan, they're likely building the cost to refinance your loan into the interest rate."

For house hunters who don't want to wait for rates to come down further, buying now and refinancing later has become a popular option. If you decide on this approach, however, make sure you understand what's at stake and choose the best type of loan for your needs.

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Valerie Saunders, the president of the National Association of Mortgage Brokers. Saunders is a mortgage broker and title agent with more than 30 years of experience. We also interviewed Jessica Lautz, deputy chief economist at the National Realtors Association. Lautz is an economist who received her Doctorate in Real Estate from Nottingham Trent University in 2019.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of mortgage products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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