Lower house payment may be costly

Dear Dr. Don,
We are currently in a 6.875 percent 30-year fixed rate loan. We have 21 years left on the mortgage. What would the interest rate need to be to make refinancing a good idea for us?
-- Scotty Switcheroo

Dear Scotty,
It's a balancing act involving how much lower the interest rate is on the loan, how much you'll pay in closing costs and how long you plan to be in the house. You can use Bankrate's refinancing calculator to find the break-even point in months.

Consider whether you want to refinance with a 30-year, fixed-rate mortgage or a loan with a loan term closer to the 21 years remaining on your existing mortgage. Extending back out to 30 years can mean paying more in total interest expense than what you would have paid with the existing loan.

Here's a hypothetical example.

Interest expense on a loan

Existing 30-year refi 15-year refi Loan amount $200,000 $200,000 $200,000 Interest rate 6.875% 5.88% 5.38% Loan term (years) 21 30 15 Loan payment $1,501.78 $1,183.71 $1,621.46 Total interest expense $178,448.03 $226,137.30 $91,862.64

In the example, the payment goes down by about $318 a month with the new 30-year loan, but the interest expense (pre-tax) goes up by almost $48,000. You can use Bankrate's Mortgage payment calculator to construct your own table. Your lender may be willing to originate a 20-year loan.

Don't just look at the interest rate if your goal is to lower your interest expense. Consider the loan term as well.

If your goal is to free up some money in your monthly budget, the 30-year loan will do that. But you're paying a price to extend your existing loan to 30 years from 21, even with the lower interest rate.

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