This year’s homebuyers need larger rate drops for refi benefits

Homeowners who bought in 2025 with the expectation of refinancing may not see savings unless interest rates fall by at least 0.75 percentage points, according to a report released this week by Neighbors Bank.

The national analysis modeled typical refinance scenarios across all 50 states using a 30-year fixed-rate mortgage of 6.8%, an average loan amount of $386,339 and $5,458 in closing costs. It found that smaller rate declines often fail to deliver short-term benefits.

Under the modeled scenario, a drop of 0.25 percentage points left borrowers $2,424 underwater after three years. A drop of 0.5 points resulted in break-even status after 3.08 years.

A decline of 75 basis points allowed borrowers to break even in just under three years, while a drop of 100 basis points delivered break-even status in 20 months and $4,764 in net savings.

“Many assume that any drop in rates is enough to justify refinancing, but the math tells a different story,” said Jake Vehige, president of mortgage lending at Neighbors Bank. “Unless you’re seeing a significant drop, refinancing may not make sense right away.

“The break-even point isn’t just about the rate. It’s about how long you plan to stay in your home, how much you pay upfront and where you live.”

The report noted that borrowers in high-cost housing markets such as California, Washington, D.C., and Hawaii reap the greatest five-year savings because their typically larger loan sizes magnify the impact of lower rates.

Borrowers in New Hampshire — with average loan amounts of $430,247 — see nearly $3,000 more in five-year savings through a 0.5-point drop than those in Louisiana, where the average loan size is $252,075.

The study also found that 15-year mortgage holders break even faster than 30-year borrowers, while conventional loan holders generally save sooner than those with government mortgages through the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA).

For example, a borrower with a 15-year loan would see $1,350 in net savings after three years from a 50-bps drop, compared with a 30-year borrower who would still be $184 in the red.

Refinance timelines also vary by state due to differences in loan sizes, property taxes, insurance and closing costs. The analysis also noted that borrowers in every state eventually break event within five years, although the savings levels differ.