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Dear Dr. Don,
I have a $120,181 mortgage loan balance at a 4.25 percent fixed interest rate for 15 years. I have 13 years left in the current term. Is it a good idea to refinance the loan for 25 years fixed at a 3.75 percent interest rate?

— Refi Ray

Dear Ray,
If you refinance like that, you’ll lower the interest rate on your mortgage but extend the mortgage term. You’ll wind up paying $28,736 more in total interest expense than you would with your existing loan as shown in the table below.

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Time to refinance?

Existing mortgage Refinancing Difference
Loan amount $120,181 $120,181
Interest rate 4.25% 3.75% 0.5%
Loan term (months) 156 300 144
Payment (amortized) $1,004 $618 $386
Total interest expense (pretax) $36,449 $65,185 $28,736

A lot of people extend the loan term when they can’t afford the current monthly payment. If that’s not your goal, then I suggest that you either shorten up the mortgage term or make additional principal payments each month. If you do the latter, make sure there’s no prepayment penalty.

If you can afford the payments, then what you really want is a new 15-year mortgage. The 15-year refinancing rate should be substantially lower than the 25-year rate. You’d have the best of both worlds: a lower mortgage payment and lower total interest expense.

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