How to spot a refinance offer too good to be true

Dollar bills shaped like a house

Some lenders use misleading advertising strategies to get customers in the door. If you aren’t familiar with these practices, you could end up with a loan that costs more than you wanted to pay or that isn’t the best fit for your needs.

When is a refinance offer a good deal, and when is there a catch?

Here are three things to watch out for:

The interest rate is substantially below the market average. It’s easy to get an idea of what mortgage rates an honest lender will offer you by checking our database. has data on national averages for the most common mortgage types. If you enter your ZIP code or hometown, you can check the rates being offered in your area (mortgage rates vary by location) and see how many points you will pay to get that rate.

If a lender is advertising a 3.0% interest rate when the national average rate on a 30-year fixed is 4.68% -- as it was in our July 20 survey -- that lender is probably advertising the rate for an adjustable-rate mortgage or the rate you could pay if you’re willing to pay thousands extra in points and closing costs.

There are no fees. Closing costs represent a barrier to refinancing for many homeowners. While the long-term savings from lower mortgage rates may be substantial, it can be difficult to come up with several thousand dollars in cash to pay for origination charges, title searches, escrow fees and other closing costs.

Lenders realize this and offer "no-cost" refinancing to entice borrowers.

There is nothing wrong with this practice -- it’s just that many consumers don’t understand there is no such thing as a no-cost refinance. A no-cost refinance can still work out in your favor in the long run, but no matter what, it will cost you money to a new loan.

If you aren’t paying closing costs up front, they could be rolled into your mortgage.

In that case, you’ll be paying closing costs plus interest for as long as you have the mortgage. Another possibility is that the lender will charge you a higher interest rate instead of charging closing costs.

The interest rate is too good for your credit score. Let’s say your credit score is 680 -- not terrible, but not high enough to get you the best rates.

Advertised rates are usually the lender’s best available rates, and the best available rates go to the borrowers with the best credit scores.

If you know your credit is subpar and you’re being offered a great interest rate, assume that the lender is going to make up for the additional perceived risk of lending to you somewhere else. You might be asked to pay a significant number of points or higher-than-usual closing costs.

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