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Wallet Canvas > Mortgage > If you have a high mortgage rate, but refinance makes sense |
Mortgage

If you have a high mortgage rate, but refinance makes sense |

May 30, 2025 8 Min Read
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If you have a high mortgage rate, but refinance makes sense |

According to a weekly survey by Bankrate, the amount of mortgage refinancing has slowed significantly since the low rates between 2020 and 2022 between 2020 and 2022, with 30-year mortgage rates hovering in the range of 7% since 2023 and 7% since 2023. According to experts researched by Bankrate, fees could remain within this range for most of 2025.

However, there is still a reason why it makes sense for you to refinance right now. Let’s dig into them.

Is refinancing a good idea now?

For most mortgage owners, current refinances do not lead to lower mortgage rates. According to a report from Realtor.com, more than 84% of mortgage holders have a rate of less than 6%. As a rule of thumb, I would like to refinance at least 1% lower than the current rate. This is because refinancing is not free. A 1% reduction in the rate can take 1-3 years to pay for the closure fee.

For example, the remaining loan balance was $390,000, with a 1% origination fee being charged and an additional $1,000 closing price. I also paid one mortgage point. At that rate, it takes about 20 months to break.

According to a weekly Bankrate survey, as of May 28th, the average 30-year mortgage rate for purchases was 6.94%. This means that you would ideally want to refinance to a rate of 5.94% or less. This is a rate I’ve never seen since 2022. For example, if you get a mortgage when interest rates are close to 8%, like in the 2023 tail end, you can now save money by refinancing.

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Refinancing may still make sense for these types of borrowers now

Refinance is not a versatile thing. For many people, refinance may not be a clear and low decision. Below are some examples of cases where refinancing in a high-priced environment makes sense.

Situation #1: Your finances have improved

In addition to overall market factors, interest rates are determined by your own personal finances. Your credit score and debt to income (DTI) ratio will affect the rate favor you gain.

Let’s say you get a mortgage at the end of the 2022 story. At the time, my credit score was 650 and the DTI ratio was 36%. For your finances, you landed your mortgage at an interest rate of 7.35%.

However, let’s say you have since paid off your debt and built a credit score of 750. You can lower your payments, especially if you plan to stay home for the long term, if you can secure a mortgage of less than 6.5%.

Status #2: I want to change the type of loan

Even if the rate is not too low than what you are currently paying, refinancing to a different loan type may be beneficial. For example, if you have an FHA loan, you can pay an annual mortgage premium (MIP) in addition to paying for the mortgage. Depending on the amount of mortgage insurance, a refinance may be beneficial to remove it.

Similarly, if you have an adjustable mortgage (ARM) and you are about to end your adoption rate, refinancing to a fixed-rate mortgage could make your payments more affordable and predictable. More than 1 million weapons emerged in 2020, according to data from the Home Mortgage Disclosure Act (HMDA). Once the intro period ends with the arm (usually in the 3-10 year range), it switches to a variable rate, which is often higher than the current fixed mortgage rate. This allows you to refinance before the introrate finishes the attractive move.

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Status #3: I want to delete a co-borrower

If you need to share your mortgage with others and remove them, we recommend refinancing. This is pretty common when married couples get divorced. You may need to buy another borrower. This can be done by tapping Equity when refinancing.

However, it is important to know that there is a difference between removing someone from your mortgage and removing ownership. You can delete a joint borrower by refinancing, but you will need to submit a QuitClaim deed to deny ownership.

Status #4: Equity must be cashed out

Your home is an asset you can tap and pay big money. College tuition, home improvements, healthcare – these are just some of the common reasons why people refinance to bring out household equity. But why do you choose to refinance cash-outs, but why do you get a home equity credit line (HELOC) or home equity loan?

First, the refinance rate is lower than HELOC or home equity loans. The catch is replacing your primary mortgage with a new mortgage that could potentially be at a higher rate. If you are heading towards the end of your major mortgage term, or if your home is paid back, this is not a big deal.

Questions to ask yourself before refinancing in a high-end environment

Before choosing to refinance in your current rate environment, you need to ask a few questions to determine your goals.

  1. What is your destructive timeline? If you are trying to refinance to lower your payments, you need to know how long it will take to achieve your savings after closing.

  2. How much of your home do you plan to own? You’ll want to stay at home and stay long enough to break and realize your refinance savings.

  3. Are you planning to refinance again if the fees drop? Ask yourself – what if prices drop even further in 2026 or 2027? Are you happy to refinance again?

  4. Is it better to tap equity on Heloc or Home Equity Loan? If you want to cash out the fairness of your home, ask yourself what is the best option. Do you prefer to refinance and exchange your current rate, or would it be better to maintain your current major mortgage and get a second lien?

  5. Do I need to buy points? Mortgage points can help you lower your fees even further, but you have to pay for them. This increases the break time, but overall less interest. However, if you decide to refinance or sell your home again, you may not see much savings from the points you’ve wanted.

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