Suze Orman
Photo: Robert Trachtenberg
Q: My husband and I have 26 years and $222,000 left on our home mortgage, with a 6.125 percent fixed interest rate. If we take advantage of the lower rates available now and refinance into a 30-year mortgage, we'd likely save around $300 a month. We could really use that money for our retirement in about ten years (although my pension will cover the mortgage costs). Doesn't it make sense to refinance?

Suze: Refinancing absolutely makes sense! Mortgage rates today are more than two percentage points lower than yours, so you can indeed save plenty. But your mistake is in assuming you should refinance into another 30-year mortgage and set back the clock on your debt. I want to encourage you—okay, challenge you—to refinance into a 15-year mortgage instead.

Based on what you told me, I'm assuming your current mortgage cost is in the vicinity of $1,430 a month. If you have good credit, you can get a 15-year mortgage at, say, 3.25 percent interest and pay just $130 more a month. Where's the deal in that, you ask? Well, rather than focusing on what you can save today, set your sights down the line: A shorter payback period reduces the amount of interest you pay over the life of the loan. If you refinance with a 30-year term, you're looking at $160,000 in total interest. On the 15-year plan, that total goes down to $59,000! Plus, you'll have the mortgage paid off 11 years ahead of your current pace, and in half the time it would take with a new 30-year mortgage.

To your point that your pension could cover your mortgage payments once you've retired, keep in mind that other expenses, like medical bills, will inevitably be creeping up then. If your pension isn't earmarked for the mortgage, you can use that monthly check for anything you might need.

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Please note: This is general information and is not intended to be legal advice. You should consult with your own financial advisor before making any major financial decisions, including investments or changes to your portfolio, and a qualified legal professional before executing any legal documents or taking any legal action. Harpo Productions, Inc., OWN: Oprah Winfrey Network, Discovery Communications LLC and their affiliated companies and entities are not responsible for any losses, damages or claims that may result from your financial or legal decisions.

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