While 2025 offers some hope that mortgage rates will move lower, it is still very much up in the air.
There are renewed concerns that inflation could resume and push up interest rates in the new year.
Especially as we welcome a new president who has promised to introduce some inflationary policies such as widespread tariffs.
This affects not only potential home buyers struggling with strained affordability, but also existing homeowners looking to refinance.
After all, millions still managed to take out mortgages when interest rates were in the 7-8% range, and they are rightly 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. Of course I wish there was.
It would be great if you could make a general statement to help home owners decide if they could benefit from it or not. But this is just not the case.
There are far too many variables involved in mortgages and real estate to do that. But we can at least pick out some tips to make the decision easier.
Today, I focus on interest rate and term refinances, which allow borrowers to exchange their old loan for a new one with a lower interest rate and new term.
These are pretty much the only game in town right now because refinancing payouts doesn’t make much sense since the prices aren’t that attractive.
One thing to consider when making a refinancing decision is the size of your outstanding loan balance.
In short, a larger loan amount makes a refinancing pencil much easier because it results in larger savings.
Homeowners with larger loans require smaller interest rate movements to refinance
The latest monthly Mortgage Monitor from ICE does a good job of illustrating how loan amounts affect refinancing decisions.
They noted that for most borrowers with loan balances under $250,000, an interest rate cut of at least 125 basis points (1.25%) was required to move forward and apply.
In other words, if their rate was 7.75%, it would have to be at least 6.5% to be considered worth the refinance. Of course, this can be quite a big question as it is a big gap between the rates.
Fortunately, mortgage rates fell to those levels in August and September before rising higher after the Fed cut its own rate.
Anyway, at the other end of the spectrum were the people with loan amounts of at least $750,000.
For this cohort, they could act on a mortgage refinance with far less incentive. ICE found that about 40% of them cut their interest rates by just 75 basis points or less.
From say 7.25% to 6.5%. And another 12% of these larger borrowers thought refinancing was worth it for an interest rate less than 50 bps lower.
In other words, going from 7% to 6.5%. Doesn’t seem like much?
Finally, those with really small loan amounts, less than $125,000, think we’re actually okay with raising their mortgage rate, with about 25% choosing this.
Why? Well, they probably went with a refinance because they needed money. And since their loan amount was small, there was less incentive to hang on to the old loan.
This is in contrast to those with larger loans at 2-4% interest who experience mortgage rate lock-in.
Let’s do the math to find out why loan amount matters to your refinance
| 250,000 loan amount | 750,000 loan amount | |
| Old mortgage rate | 7.75% | 7.25% |
| Old payment | $1,791.03 | $5,116.32 |
| New mortgage interest rate | 6.50% | 6.50% |
| New payment | $1,580.17 | $4,740.51 |
| Difference | 211 USD | $376 |
Taking the two loan scenarios I threw out above, we have a borrower with a loan amount of $250,000 and a mortgage rate of 7.75%.
They see that it is possible to refinance down to 6.50%, which is a big move purely in terms of interest. But how much does it actually save them per month?
Only about $211 a month. Not a random amount, but it illustrates why a large interest rate shift was needed to make any associated or upfront costs worth it.
Remember, you want to keep the loan long enough to justify the closing costs involved in the transaction.
Then we have our $750,000 borrower with an interest rate of 7.25% that refinances down to 6.50%.
This results in savings that are nearly double ($376) compared to the other borrower, despite a much smaller rate improvement.
The caveat here is that the borrower with the smaller loan amount may see $200 as a savings as or more valuable than the borrower with the larger loan amount who saved almost $400.
But if someone tries to tell you that rates have to drop by X amount for your refinance to be worth it, ignore them.
Instead, take the time to do the actual math to see exactly how much you can save. Or maybe not save!
There are no shortcuts if you want to save money on your mortgage. But if you put in the time, the ROI can be pretty incredible.
(photo: The Harry Manback)
Before creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and existing) homebuyers better navigate the home loan process. Follow me on Twitter for hot takes.
