Earlier this month, an article appeared in San Francisco Chronicle about repeat no-cost refinancing in a declining rate environment. The piece came out January 4, the day after minutes from the Fed's last 2012 rate meeting were released. Those minutes revealed more bias toward ending Fed support of low mortgage rates than previously thought, and rates rose immediately.

So is the free refi boom over? Not quite, but we're getting close. Below I explain, first by defining "free refi," then by offering some rate market context.

In the Chronicle piece, it explained how a smart repeat refinancing strategy is to do no-cost refinances while rates are dropping, then when rates are at the bottom, doing a normal-cost refinance (which has a rate that's .125% to .25% lower than a no-cost refinance) or even pay points to buy a rate down to capture the true lowest possible low. Here's an excerpt:

Likewise, Julian Hebron, vice president of RPM Mortgage in San Francisco, said, "As rates continue to drop, refinancing repeatedly is quite common in the past 24 months."
Many clients chose no-cost refinances, in which lenders pay all closing costs in exchange for the borrower taking a rate that is one-eighth or one-quarter point higher than the current market rate, he said.
"No-cost refinances are the best play in a declining-rate environment," Hebron said. That's because they allow borrowers to refinance multiple times without digging into their own pockets.
"We've been advising clients not to pay points for most of 2012, on the belief that rates are remaining at existing lows or dropping," he said.
 
Up until now, this no-cost refinance strategy has worked for borrowers nationwide. But the Fed minutes were the first reminder to markets and consumers that rates won't stay this low forever.

So where do we go from here?

There's a case to be made that rates won't spike sharply because mediocre global economic fundamentals and fiscal paralysis in the U.S. and Europe generally bode ok for bond markets and rates. And if we look back to those Fed minutes indicating Fed MBS buying may end this year, some disagree, including Goldman Sachs:

So what should we make of the FOMC minutes, which suggest that most Fed officials expect to end QE3 by late 2013? Not too much, in our view. For one thing, it is important to remember that the outlook for monetary policy depends on the outlook for the economy. The midpoint of the committee's "central tendency" forecast for real GDP growth in 2013 is 2.65%, which probably implies growth of 3-3½% in H2 given the obvious headwinds in H1. If that turns out to be too optimistic, as we suspect it will, QE3 will probably last longer than Fed officials currently expect. More importantly, the minutes have a tendency to mislead at times when the range of views on the FOMC is large because they paint an overly "democratic" picture of the decisionmaking process. Even under Ben Bernanke-a much less autocratic chairman than many of his predecessors-it is ultimately the Fed leadership that drives the decisions, and it is their views that we need to identify. This is difficult to do with confidence in the minutes, but we suspect that it was mainly the leadership that "...emphasized the need for considerable policy accommodation but did not state a specific time frame or total for purchases." Based on our own expectations for the economy and our understanding of the reaction function, we continue to expect that QE3 will run through 2013 and-at a reduced pace-2014 as well.
 
All of this is a long way of offering a wake up call to rate shoppers "holding out for better" because the best levels have been tested many times, and better is unlikely.
It's also a reminder to those who've done a few no-cost refis over the past couple years to do one last check to see if it's mathematically sound to do one final fix of your rate before the market turns.