Dave Ramsey says: Refinancing home at great rate is worth higher monthly

Dear Dave,

My husband and I are on Baby Step 2, and we’ve paid off about $30,000 in consumer debt since March.

We were wondering if we should refinance our mortgage. Our current rate is 4.875%, with 28 years remaining on the loan.

We found a 15-year refinance at 2.5%, which would raise our monthly payments about $200, but we can handle that. We have $150,000 in equity in our home and about $207,000 left on the loan.

What do you think we should do?

— Raye

Dear Raye,

You two have done a great job this year! I’m so proud of what you’ve accomplished and that you’re looking to the future.

Baby Step 2 wouldn’t be affected, except that your monthly mortgage payment will go up a little.

I wouldn’t pay the refinance costs out of pocket, though. I’d roll them into the loan.

You’d be saving more than 2% by locking in this crazy-low interest rate, and you’re knocking the whole thing down to a 15-year loan. I love all that.

It’s definitely worth the extra $200 a month to make it happen.

Think about it this way. You’re going to be saving more than $4,000 a year with the interest rate reduction.

You’re not going to see it in cash flow because of the $200 increase in monthly payments, but over the scope of the loan, you’re going to be charged between $4,000 and $4,500 less per year for interest.

All that money is going toward paying back the closing costs and reducing the principal built into the move from 28 years to 15 years.

Yes, you should do this!

— Dave

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