If Mortgage Rates Fall Tomorrow, Who Wins?

Many of today’s homebuyers are locking in a 7% rate but dreaming of the sub–3% lows of the pandemic.

As a result, many 2025 buyers have accepted the reality of current rates, with plans to refinance when rates drop. However, a study conducted by Neighbors Bank found that most 2025 buyers will need a -0.75 rate decrease before they can see substantial savings from a refinance and break even under three years. When examining government-backed mortgage refinance scenarios, this period was sometimes extended up to twice as long compared to those with conventional loans.

We also analyzed the advantage 15-year mortgage holders have over 30-year borrowers in terms of refinance savings and break-even periods. We found that 15-year buyers could save over $1500 in three years with a -0.5 rate reduction, while 30-year buyers were nearly $200 in the red during the same timeframe.

Finally, we explored the differences in savings and break-even periods across states. We discovered that variations in loan amounts, homeowners insurance, property taxes, and title fees played a significant role in determining how long it takes a buyer to break even and save. Surprisingly, with a 0.5-point reduction, only 10 states would see savings within three years.

Note: These scenarios are for example purposes, to showcase possible costs and savings for a consumer who refinances their mortgage. Please see our methodology for more information.

When Does a Refinance Make Sense?

Even without a dramatic rate drop, refinancing can still pay off under the right conditions. The break-even point is when the total savings from a lower rate are greater than the upfront closing costs of the refinance. As a rule of thumb, borrowers typically look for a break-even point within about 3 years to make refinancing worthwhile.

Beyond rate savings, refinancing may also make sense if you need to:

• Access built-in equity through a cash-out refinance

• Lower your monthly payment by extending the loan term

• Switch from an adjustable-rate mortgage to a fixed-rate product for stability

While equity access and rate structure switches are important tools, our analysis focuses solely on potential savings borrowers can gain through rate and term refinancing.

So how long would it take for a 2025 buyer to recoup refinancing costs? To help answer these questions, we analyzed average 2025 mortgage rates and modeled savings and break-even timelines for rate drops of 0.25 to 1 percentage point across common borrowing scenarios. Let’s take a look:

Most Buyers Will Need More Than a 0.5-Point Drop to Profit

In 2025, repeat buyers still account for the majority of home purchases*. We found that the average 2025 buyer had a 25% down payment, a 30-year term at 6.798%, a $386,339 loan amount, and $5,458 in closing costs for a refinance.

Using these benchmarks, here’s how the typical 2025 homeowner would fare with modest rate drops of 0.25, 0.5, 0.75, and 1.0 percentage points.

Based on our modeling, it’d take a drop of at least 0.6 points before a rate cut would deliver clear gains within a reasonable timeframe.

At a quarter-point drop, borrowers would still be $2,424 underwater after three years and need more than five years to break even. A half-point reduction shortens the break-even timeline to 3.08 years, but borrowers still don’t see any payoff at that point.

A 0.75-point cut brings the break-even point to just under three years, after which homeowners begin to see positive savings. Finally, a full percentage-point drop slashes the payoff window to 20 months and produces $4,764 in net savings in under 2 years.

Refi Comparisons For 15- vs. 30-Year Borrowers

A common borrowing scenario involves choosing between a 15-year and a 30-year term. Comparing the two loan terms highlights a key refinance trade-off. A 15-year loan requires larger monthly payments but saves significantly on interest over time. That interest advantage carries over to refinancing: because 15-year borrowers pay down principal faster, they recoup their refinancing costs much sooner than 30-year borrowers.

This example illustrates that 15-year refinancers accrue savings much more quickly than 30-year borrowers. In the first three years, the shorter-term loan already yields a modest net gain (about $1,350), while the 30-year borrower remains slightly underwater (–$184). By year seven, the 15-year holder has banked nearly $10,600, roughly $3,300 more than the amount saved by the 30-year borrower.

That advantage grows over time: at year 15, the 15-year refinance has saved about $29,100 compared to $21,650 for the 30-year. By year 30, the difference between them is more than $8,400 ($29,076 vs. $21,647).

15- vs. 30-Year Break-Even Periods

Borrowers with 15-year terms also break even much sooner than 30-year borrowers. Because shorter mortgage terms start with higher monthly payments and faster principal payoff, each rate cut reduces their payment by more dollars. In contrast, 30-year borrowers enjoy lower monthly payments but pay down principal more slowly, which lengthens their break-even horizon and means more paid in interest.

Like refinance savings, the break-even points are also cut in half for 15-year borrowers.

In this example, based on a 0.25 percentage point rate drop and a 20% down payment, 30-year borrowers take 5.5 years to break even, while 15-year borrowers break even in just 3.3 years.

Refi Savings For Conventional vs. Government-Backed Loans

Conventional mortgages remain the most popular mortgage choice, but government-backed loans are gaining traction, especially among first-time buyers who may be more reliant on lower down-payment requirements and easier qualification standards.

With a government-backed loan, borrowers trade smaller upfront costs for higher interest expenses over the life of the loan. With a refinance, that trade-off carries through: conventional borrowers generally realize greater long-term savings, while government-backed borrowers see more upfront relief but smaller cumulative gains. Below, we compare how refinance savings with a 0.5-point drop unfold for each loan type over time:

Across every program, deeper rate cuts yield larger net savings at each horizon. For example, a VA borrower sees roughly $4,175 in positive net savings after three years with a full-point drop, whereas an FHA borrower still loses about $2,111 in that same window.

By year 10, even FHA borrowers with a 0.75-point drop turn a profit (about $17,058), though conventional and VA borrowers reach profitability much sooner and accumulate tens of thousands in savings over 15–30 years.

Why Government-Backed Loans Take Longer To See Refi Savings

Government-backed mortgages include upfront and ongoing insurance or guarantee fees. Conventional loans also have insurance costs, but those can usually be canceled once the borrower reaches 20% equity.

FHA loans charge a 1.75% upfront fee and a monthly MIP for the life of the loan, while USDA loans charge a 1% guarantee fee and an annual fee (0.35% of balance). VA loans require a one-time funding fee but no monthly insurance.

In contrast, conventional borrowers who refinance with any amount of equity below 20% must pay only pay ongoing mortgage insurance until that number of equity is reached, allowing them to recover refinance costs in as little as 1.58 years under a full-point rate drop—over two years faster than a similarly situated FHA borrower.

Average Break-Even Periods By Loan Type

Our study found that break-even periods also vary greatly by loan type.

At just a 0.25-point rate drop, a conventional borrower with a 10% down payment breaks even in about 5.33 years, while a 30-year VA borrower needs roughly 6.67 years, a USDA borrower about 8.75 years, and an FHA borrower over 11.83 years.

With larger rate drops, all loan types break even sooner, but FHA is still the slowest. Even with a full-point drop, FHA borrowers wait 3.50 years, compared to 1.58 years for conventional loans, 2.00 years for VA, and 2.58 years for USDA. This is unsurprising considering that FHA loans have the highest fees (1.75% at closing and typically 0.55% annually for most borrowers). 

Average Refinance Savings By State

Variations in average loan size, property taxes, insurance premiums, and closing costs drive significant differences in refinance savings from state to state. We modeled a scenario with a 0.5-point rate drop to see how homebuyers in different states would fare.

The results were striking: Only 10 states recouped their refinancing costs within three years, while homeowners in the other 40 states remained, on average, at least $100 underwater.

Every state eventually breaks even within five years, but the size of the savings depends greatly on location. For example, New Hampshire borrowers, who have an average borrowing amount of $430,247, see nearly $3,000 more in five-year savings after refinancing at a 0.5-point rate drop than homeowners in Louisiana, who have an average loan amount of $252,075.

States With the Best Refinance Savings Over 5 Years

Here’s a look at the states that offer the highest net savings over 5 years using the same 0.5-point rate reduction scenario:

It’s no surprise these states have the highest refinance savings, since they also have some of the most expensive housing markets in the country. This means higher mortgage payments and bigger dollar savings when refinancing.

These differences underscore how local market conditions, from home prices to tax rates, can affect whether and when refinancing makes sense.

Should Prospective Buyers Wait To Buy?

Based on our analysis, waiting for a modest rate drop may not pay off quickly enough to justify delaying a home purchase. Our data indicates that only rate cuts of roughly 0.6 percentage points or more offer meaningful savings within a reasonable timeframe for typical 2025 buyers. Even a half-point decrease takes over three years (37 months) to become neutral, and nearly four years before homeowners see a net gain. First-time homebuyers and those using low down payment options would need to wait even longer to start recouping savings. In other words, modest rate improvements still require a multi-year commitment before refinancing truly offsets

This doesn’t mean buyers should rush in, but those planning to stay in their homes for at least three to five years may not benefit from delaying a purchase for a small rate drop. Only a substantial drop of 0.75 percentage points or more reduces the payoff period to under three years, and a full percentage point cut can deliver net savings in less than two.

For those planning to stay in their home for at least five years, locking in today’s rate might be the smarter choice for long-term savings.

Methodology

The Neighbors Bank 2025 Mortgage Refinance Study used multiple public and proprietary data sources to model break-even periods and net savings.

Sources included NerdWallet, Tax Foundation, 2024 HMDA filings, the FRED series for 30- and 15-year conventional, 30-year VA, 30-year USDA, and 30-year FHA mortgages, 2023 ACS 5-year estimates, and U.S. Census Bureau data.

• Interest Rates: The national average 30- and 15-year conventional loan mortgage rates were determined by averaging the weekly national mortgage rates via FRED from January 2, 2025, to July 17, 2025. The national average 30-year USDA, 30-year FHA, and 30-year VA loan mortgage rates were determined by averaging the daily national mortgage rates via FRED from January 2, 2025, to July 30, 2025.

• Loan Amount & Down Payments: The national average loan amount and down payment values were taken from 2024 HMDA filings. Calculations for conventional PMI assumed cancellation at 20% equity.

• Closing Costs: Closing costs for conventional loan refinances included an origination fee of 0.75%, a state-specific value for titling fees, and a $600 appraisal. For HOI and property taxes, we took an average of the values across all 50 states. For government-backed refinance costs, the same origination and titling fees applied, but we removed the appraisal assumption and added any one-time fees, such as an upfront MIP or guarantee fees.

• Mortgage Insurance & Government-Backed Loan Fees: When we analyzed data for conventional loans with less than 20% equity at closing, we assumed a private mortgage insurance fee of 0.75%. USDA loans require a 0.35% annual fee. The VA loan funding fee also varies depending on the down payment provided at closing and whether it is a borrower’s first or subsequent use; we assumed 0.5%, the standard fee for VA streamline refinances. FHA loans require a 1.75% upfront fee and an ongoing premium that varies depending on the loan amount and down payment. For our analysis, we assumed the most common annual FHA MIP fee of 0.55%.

• Break-Even Periods: When calculating the breakeven period for all scenarios, we assumed seven months of payments before the simulated rate drops and added the amount of equity gained accordingly to the new, refinanced loan amounts. The break-even calculation was the difference in monthly savings of the new monthly mortgage payment divided by the total cost of refinancing. The break-even period only takes into account recouping the cost of the refinance, not changes in PMI. Totally breaking even, including both refinance costs and changes in PMI, may take longer than the stated number of months.

• Average Savings: The refinance cost savings were determined by accounting for the savings in monthly payments after applying a rate drop, as well as the removal or reduction of mortgage insurance over certain loan periods.

Additional Sources

*https://cms.nar.realtor/sites/default/files/2025-04/2025-home-buyers-and-sellers-generational-trends-04-01-2025.pdf