While 2025 offers some hope that mortgage rates will fall, this is still very high.
There are renewed fears that inflation could flare up again, pushing interest rates higher in the new year.
Especially since we welcome the new president who has promised to introduce some inflationary policies, such as large-scale tariffs.
This impacts not only potential homebuyers grappling with affordability, but also current homeowners looking to refinance.
After all, millions were still able to get mortgages when interest rates were in the 7% to 8% range, and they are rightfully looking for relief.
How can we make the decision to refinance a little easier?
One thing I want to point out first is that there is no single rule of thumb for refinancing. Sure, I wish there was.
It would be great if you could make a comprehensive statement to help homeowners decide whether or not they could benefit. But this is not the case.
There are too many variables associated with mortgages and real estate to do this. But we can at least benefit from some tips to make the decision easier.
Today, I focus on term and rate refinancing, which allows borrowers to replace their old loan with a new loan with a lower interest rate and a new term.
This is pretty much the only game in town right now because cash-out refinances don’t make sense since the rates aren’t exactly attractive.
However, one thing to consider when deciding to refinance is the amount of loan balance you owe.
Simply put, a larger loan amount makes refinancing easier because it results in greater savings.
Homeowners with larger loans need less price movement to refinance
Latest ICE Monthly Mortgage Monitor He did a great job of explaining how loan amounts affect refinancing decisions.
They noted that for most borrowers with loan balances of less than $250,000, an interest rate reduction of at least 125 basis points (1.25%) was needed for them to go ahead and apply.
In other words, if your interest rate is 7.75%, it must be at least 6.5% to consider refinancing worthwhile. Obviously, this can be a big ask as there is a wide gap between prices.
Fortunately, mortgage interest rates fell to those levels in August and September, before bouncing back higher after the Federal Reserve cut rates.
Anyway, on the other end of the spectrum were people with loan amounts of at least $750,000.
For this group, they can work to refinance their mortgage with much lower incentives. ICE found that nearly 40% of them cut interest rates by just 75 basis points or less.
From 7.25% to 6.5%. 12% of these senior borrowers felt that refinancing was worth it at a rate of less than 50 basis points.
In other words, from 7% to 6.5%. Not many seem to do that?
Finally, those with very small loan amounts, think less than $125,000, we’re actually OK with raising their mortgage rate, with about 25% opting for this.
Why? Well, maybe they went with a cash-out refinance because they needed the money. Since the loan amount was small, there was less incentive to cling to the old loan.
This contrasts with those with larger loans at 2-4% rates who experience mortgage rate stabilization.
Let’s do the math to see why loan amounts are important to your refinance
| The loan amount is 250 thousand dollars | The loan amount is 750 thousand dollars | |
| Old mortgage rate | 7.75% | 7.25% |
| Old payment | $1,791.03 | $5,116.32 |
| New mortgage rate | 6.50% | 6.50% |
| New batch | $1,580.17 | $4,740.51 |
| difference | $211 | $376 |
If we take the two loan scenarios I presented above, we have a borrower with a loan amount of $250,000 and a mortgage interest rate of 7.75%.
They believe it is possible to refinance at up to 6.50% interest, which is a big step up in terms of interest rate. But how much does it actually save them each month?
Only about $211 per month. It’s not an incidental amount, but it shows why a significant price move is needed to make any associated or upfront costs worth it.
Remember, you want to keep the loan long enough to justify the closing costs associated with the transaction.
Then we have our $750,000 borrower with an interest rate of 7.25% being refinanced to 6.50%.
This results in a savings of nearly double ($376) versus the other borrower, despite a much smaller improvement in rate.
The caveat here is that a borrower with a smaller loan amount may view $200 as equal or more valuable savings than a borrower with a larger loan amount who saved approximately $400.
But if someone tries to tell you that rates have to drop by X amount to be worth your refinancing, ignore them.
Instead, take the time to do the actual calculations to figure out exactly how much you’ll save. Or maybe not save!
There are no shortcuts if you want to save money on your mortgage. However, if you put in the time, the ROI can be pretty amazing.
(image: Harry Manpack)
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My work experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
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