So far, 2025 is shaping up to be a bit better when it comes to mortgage rates.
While the 30-year fixed is only slightly below year-ago levels at the moment, it seems to be trending in a better direction compared to last year.
It’s currently around 6.75%, which is about an eighth below the 6.875% average seen in early March 2024.
But unlike back then, mortgage rates might sink further into spring, instead of rising like they did in April and May.
And that could be a boon for existing homeowners looking to refinance an existing home loan.
Rate and Term Refis Continue to Gain as Mortgage Rates Improve
There are three main types of mortgages – the home purchase mortgage, which is self-explanatory.
And the mortgage refinance, which is broken down into a rate and term refinance and a cash out refinance.
When mortgage rates kept rising and eventually hit 8% in late 2023, nobody was applying for a rate and term refinance.
Why? Because you’d only really do so if you could obtain a lower interest rate in the process.
That meant the only real game in town, aside from some purchase lending, was cash out refinances, where existing homeowners were either consolidating debt or tapping equity to pay for other expenses.
However, now that mortgage rates are seemingly falling, and well below those scary 8% levels seen about 18 months ago, rate and term refinances have made a little comeback.
They’ve actually been the one bright spot lately in the mortgage world, with cash out refis also eeking out some smaller gains as well.
Long story short, those high mortgage rates seen over the past few years have created an opportunity now that they’re quite a bit lower.
Borrowers who took out mortgages with rates in the high-7s or even 8s can now trade them in for something more palatable, like a 6.5% rate.
For example, on a $400,000 loan amount a hypothetical borrower could lower their principal and interest payment by roughly $300 per month.
Rate and Term Refi Volume Up Nearly 120% Year-over-Year
The latest Market Advantage report from Optimal Blue revealed that rate/term refinance lock volume surged nearly 40% (39.2%) in February from a month earlier.
And the 3-month change was an even higher 48.3% increase, while the 12-month change was a whopping 118.5% increase.
Of course, when you look at the chart above, you can see that rate and term refis (dark blue) still account for a sliver of overall loan production.
So while they are enjoying some nice percentage gains, they aren’t as good as they look. But you’ve got to start somewhere and the recent increase is a promising start to 2025.
As alluded to earlier, if mortgage rates keep trending lower as the months go by, volume could really explode.
For reference, the 30-year fixed was around current levels last year before turning up to around 7.50% in April and May.
It eventually eased during summer before falling to around 6% on the Fed pivot, which led to a big uptick in refinance activity.
But that was short-lived because of a hot jobs report, followed by a Trump presidential victory, both of which propelled rates higher.
Assuming cool economic data continues to come in, and Trump’s tariffs don’t cause too much trouble (no guarantee there), rates could revisit those 2024 lows and even go lower.
If that happens, there’s a lot of pent-up refinance demand waiting on the sidelines, possibly some who missed that window last September before rates shot up again in October.
Sub-6% Mortgage Rates Could Add Millions of Refinance Candidates
When mortgage rates hit 6.125% in September, the in-the-money refinance population jumped by about 1.3 million, per a report from ICE at the time.
Had rates continued to fall, to say 5.75%, another two million refi candidates would have materialized.
And if rates went down to 5.5%, which many refer to as a magic number for home purchases, another 1.2 million more.
In other words, it might be possible to unlock three million or more refinances if/when the 30-year fixed falls back to the mid-5s, which is looking like a real possibility this year.
That could finally make refinances account for a decent share of overall lock volume again, instead of merely seeing big percentage gains from rock-bottom levels.
At the same time, if low mortgage rates are driven by a recession, you might have a situation where home purchase lending falls, despite improved affordability.
Simply put, lower demand because of fewer eligible home buyers means less home sales.
That too could push up the refinance share of the market, which stood at just 22% in February.
It was as high as 32% last September, so if mortgage rates fall below those levels, it wouldn’t be unreasonable to see refis grab a 40% share again.
And that could make 2025 the year of the rate and term refinance after a tough few years.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.
