Yes, it's always better to have a lower interest rate on your mortgage than a higher one. But one thing people seem to overlook is the matter of the term involved. "We can drop our monthly payment from $1,000 to $800. And even finance the new closing costs! Why wouldn't anyone do it?"

Perhaps you should, particularly if present monthly payments are your main concern. But before you do, you should understand:

If you're already five years into your present 30-year mortgage, and you're signing on for another, you'll end up paying for your home for a total of 35 years. Some of the monthly savings is indeed due to a lower interest rate. But the rest comes because you'll be paying five years longer than originally scheduled.

That may or may not matter to you, if current costs are your most important consideration right now.

But the right way to figure savings is to compare the 25 years left on your old 30-year loan, with the monthly cost of a new 25-year mortgage. Perhaps your $1,000 payment would drop to only $900 in that case. $100 a month is the true savings at the new interest rate.

If, after that, you decide to go for a new 30-year mortgage anyhow, at least you'll realize what's involved.

You might want a new 7 percent loan for as long as possible, if you have the discipline to do something useful with the monthly savings. Paying off a high-interest credit card is always a wise first investment. You may have a new business venture in mind, or prefer the uncertainty and risk of dabbling in the stock market.

If you're handling your present payment comfortably, and you will need extra cash as the kids approach college age, you might want to take a different tack altogether, refinancing with a 15-year or even 10-year loan. Even though your monthly payment would remain the same, you'd clear up the debt sooner than originally scheduled.

As with most other financial decisions, there's no hard and fast rule on what's best for your particular situation.

Financial advisors will often answer some of your questions with a firm "It all depends."

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Published: May 10, 1999

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