Question: We currently have a mortgage balance of about $180,000. We are in the ninth year of a 30-year term and our rate is 7.50 percent. I think we should refinance our balance to a lower interest rate but my husband thinks it would be a bad idea because we would have to start from scratch on a new thirty-year term. Wouldn't it always make sense to refinance if we can get a lower interest rate?

Answer: Your husband has a good point. A lot of people don't realize that the monthly savings reaped from a refinance is not just a result of lowering the interest rate. Spreading the mortgage balance out another thirty years will indeed drop your payment even if the interest rate doesn't change. To determine if refinancing makes sense for you, it all boils down to the same question: The homeowners must establish their objectives.

With the little information I have about your loan, I was able to punch some numbers into my calculator and estimate that your beginning balance nine years ago was about $205,000.

Your monthly principal and interest (P&I) is about $1,433 and you have about 21 years left on your mortgage. Now, let's take a look at your options.

• You could refinance your existing balance to a new 30-year loan. If you pay 6.50 percent with no points, then your new P&I payment would be $1,167, saving you $265 per month. This is a terrific option for folks who are looking to drop their monthly payment.

  However, as your husband points out, much of these savings are a result of starting out on a new thirty-year term. Is this bad? Not necessarily. If you are likely to have high taxable income in the foreseeable future, borrowing money at a tax deductible 6.50 percent rate is cheap money no matter how you look at it.

  Think about what you would do with the $265 monthly savings. If you piddle it away, it's not such a good idea. However, if you take the money and consciously invest it in a college fund, for example, it could be a great move.

• You could refinance your home to a 20-year term. If you pay 6.50 percent then your monthly P&I payment would drop to about $1,342, saving you $91 per month. You would also shave a year of your term. Over the next 20 years, you would save nearly $40,000.

• You could refinance to a 15-year term. The interest rate is a bit lower -- perhaps 6.25 percent for purposes of our example, but your payment would increase to about $1,543 -- $110 more than your current payment. But you would shave six years off your loan term. Even though your payment increases, your net savings over the life of the loan is about $83,000. This is good for folks who are looking to pay off their home and are comfortable with a higher mortgage payment.

So as I said, the most important thing to do is establish your personal objectives. Once this is done, you will be able to choose the refinance package that best meets your needs.

For more articles by Henry Savage, please press here.

Published: December 5, 2001

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.