Larger Loan Amounts Require a Lower Mortgage Rate to Refinance

While 2025 offers hope that mortgage rates will drop, that is still very much up in the air.

There are renewed concerns that inflation may pick up again, pushing higher rates into the New Year.

Especially as we welcome a new president who has promised to introduce anti-inflationary policies, such as flat taxes.

This affects not only prospective home buyers who are struggling to pay the bills, but also existing home owners who are looking to refinance.

After all, millions are still able to take out loans when rates are in the 7-8% range, and they are looking for help accordingly.

How Can We Make Refinancing Decisions A Little Easier?

One thing I want to point out first is that there is no single refinance rule of thumb. Of course, I wish you were there.

It would be great if you could make a single statement of accommodation to help landlords decide whether or not they can benefit. But this is not the case.

There are too many variables involved in mortgages and real estate to do that. But at least we can give some tips to make the decision easier.

Today, I focus on rate and term refinancing, which allows borrowers to trade in their old loan for a new one with a lower interest rate and a new term.

This is the only game in town right now because refinancing doesn’t make a lot of sense and the pricing isn’t that attractive.

However, one thing to consider when making a refinance decision is the size of your outstanding loan balance.

Simply put, a larger loan amount makes pencil repayment easier because it leads to greater savings.

Homeowners With Larger Loans Need a Low Rate Move to Refinance

The latest monthly Mortgage Monitor from ICE does an excellent job of showing how mortgage rates affect refinancing decisions.

They noted that for most borrowers with loan balances under $250,000, a rate reduction 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 eligible for repayment. Obviously this would be a big question as that is a wide gap between the levels.

Fortunately, mortgage rates fell to those levels in August and September, before rebounding after the Fed cut its rate.

However, on the other end of the spectrum were people with loan amounts of at least $750,000.

In this collection, they can make a mortgage with very little interest. ICE found that about 40% of them lowered their rates by 75 basis points or less.

From 7.25% to 6.5%. And another 12% of these prime loan borrowers felt that refinancing was worth less than 50 bps lower.

In other words, from 7% to 6.5%. Doesn’t seem like you’re doing much?

Finally, those who have a really small loan, think less than $125,000, we are actually fine with increasing their loan rate, about 25% choose this.

Why? Well, maybe they went with a cash out refinance because they needed money. And since their loan amount was small, there was little incentive to hold on to the old loan.

This contrasts with those with larger loans at rates of 2-4% experiencing a loan amount lock-in.

Let’s Do the Math to Find Out Why Mortgage Rates Matter in Your Refinance

Taking the two loan scenarios I threw out above, we have a borrower with a loan amount of $250,000 and a loan amount of 7.75%.

They realize that it is possible to return money up to 6.50%, which is a great rate of smart moves. But how much does it actually save them per month?

It’s only about $211 a month. It’s not a risk amount, but it does show why a large-scale move was necessary to make any associated or upfront costs worth it.

Remember, you want to keep the loan long enough to allow for the closing costs involved in the sale.

Then we have our $750,000 mortgage at 7.25% which is refinanced to 6.50%.

This results in almost double the savings ($376) compared to the other borrower, with very little improvement in price.

The caveat here is that a borrower with a small loan amount may view $200 as an equally or more important savings than a borrower with a large loan amount who saved about $400.

But if someone tries to tell you that rates need to drop by X amount for your refinancing to be worth it, ignore them.

Instead, take the time to do some real math to see how much you stand to save. Or maybe don’t 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 very good.

(Photo: Harry Manback)

Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the mortgage process. Follow me on Twitter for the latest.

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