Refinancing your mortgage worth it at 1-2 percent less

Q. I currently have a 30-year, 5 percent fixedrate mortgage on my single-family home that I still owe $300,000 on and have 21 years left to pay off. I’ve been thinking about refinancing, but I have two friends who keep telling me that unless I can lower the interest rate by at least 2 percentage points, I shouldn’t bother. What do you think? — Belinda from Lynn

A. Belinda — I think that your friends are well meaning, but completely wrong.

In their defense, only refinancing if you could lower your interest rate by 2 percent made a lot of sense 50 or 60 years ago — but that hasn’t been the case for a long time. Far too many people still follow this old — and incorrect — rule of thumb and lose out on saving a lot of money by refinancing.

Let’s look at your situation.

Although interest rates have recently gone up, they are still historically low. Assuming you have a very good credit score, you could refinance your home on a 30-year fixed rate, paying no points and no closing costs, to a rate of about 3.75 percent — possibly even a bit lower.

By doing so, you’d save yourself a significant amount of money each month with no money out of your pocket. That would certainly be worth your while.

Even if your credit score is not perfect — let’s say it falls into the good category — you’d still probably be able to lower your interest rate to about 4 percent.

Make sure to pay an extra amount on your new monthly payment each month so that you will still pay off the new mortgage in 21 years.

Extending the refi mortgage back out to 30 years will cut into your savings. You might even explore the possibility of refinancing to a 20-year mortgage, which will give you an even lower rate.

With the money you save, you could treat your friends to a dinner out and perhaps educate them about how they can save money by refinancing their mortgages too!

If you would like any of financial question answered, please email it to Rick Shaffer at: AskRick@BostonHerald.com.