Dear Dr. Don,

I have a mortgage balance of $118,000 with 148 payments left. The home is worth about $200,000 in today's market. I have excellent credit. I don't carry a balance on my credit cards, and both of my vehicles are owned free and clear. I am not sure how long I plan to stay in the house. It will take at least five years before the value comes back.

I thought about refinancing for either 15 or 20 years, but I do not know if it's worth the cost. I have about $17,000 in savings, but do not want to put the cost of the refinance back into my loan. The original loan was $128,000 in May 2008, at 5.875%.

-- Thomas Turnover

Dear Thomas,

With a little more than 12 years left on your existing mortgage, you shouldn't need to extend out to 20 years. You can finance the closing costs rather than dip into savings. With your good credit, you should be able to qualify for a lender's best rate. The key sticking point here is how long you plan to be in the house.

Waiting around for your home to regain its lost value may not be your best decision. You're taking a couple of risks with that approach. One is what's happening to the price of your next home between now and when you buy it. If it appreciates at a faster rate than your existing home, you'll pay that difference. The other is where mortgage interest rates are headed. You've seen your home equity decline, but you aren't underwater in your mortgage. You have options that a lot of homeowners in today's market wish were available to them.

The table below uses Bankrate's mortgage payment calculator along with its amortization schedule to look at interest expense and loan balances in refinancing your home either over the life of the existing mortgage, or over the next five years. A key assumption in the table is that, if you refinance, you will make additional principal payments equal to the difference between your old and your new mortgage payments.

Refinance comparison chart
  Existing mortgage Refi with a 15-year mortgage Existing mortgage for 5 more years Refi with a 15-year mortgage for 5 years
Loan balance: $118,000.00 $122,000.00 $118,000.00 $122,000.00
Interest rate: 5.875% 4.29% 5.875% 4.29%
Loan term (months): 148 138 60 60
Loan payment: $1,122.60 $1,122.60 $1,122.60 $1,122.60
Total interest: $48,144.85 $32,730.06 $29,460.77 $21,509.17
Difference in interest expense:   $15,414.79   $7,951.60
Loan balance:     $80,104.75 $76,153.20
Difference in loan balance:       $3,951.55
Pretax savings:   $15,414.79   $11,903.15
Estimated after-tax savings at 25%:   $11,561.09   $8,927.36

I assumed you financed estimated closing costs of $4,000. You can use Bankrate's 2010 Closing Costs Study to find the average closing costs for your state. The after-tax savings estimate assumes that you can fully utilize the mortgage interest deduction on your federal income tax return and it isn't just replacing the standard deduction. What the table shows me is that, if you want to wait around for your home price to appreciate, you can justify refinancing the loan over a planned five-year horizon. I'd still suggest taking a hard look at selling now and capturing any potential equity appreciation in your new home versus your old one.