'Free Shipping' on a listing just means the seller is covering this cost, which is just usally added to the item's price.
For a refund, you need to refund everything the buyer initially paid you.
When they open a return case, if your money is on hold, eBay will use your back up source, which is usually your bank account.
When the refund has been finalised, money on hold is released to you.
@welshcollectables23