Q: I am five years into a 30 year fixed-rate mortgage at 5.75 percent. We had planned to stay in the house for two to three years, although with the real estate market is such bad shape right now, we may end of staying in the house for a longer period.

I can refinance my mortgage at 4.875 percent with no points but I’ll have to pay $3,500 to $4,500 in closing costs. I would save about $180 per month but the closing cost would be added onto the mortgage balance, so I’d be paying interest on that money for 30 years.

We’re having a hard time justifying going back to a 30 year loan when we’ve paid down five years already. Is this a good idea or not?

A: First, you should have your lender amortize your loan based on a 25-year payout so you can compare the loans on an apples-to-apples basis. You should see if your monthly payment on the new loan is less than your existing loan.

But the key to making the right decision is analyzing how long it will take you to repay the costs of the refinancing. If you were to pay the refinance costs upfront, you could then compute the number of months it would take you to break even. If the number of months to break even is more than a year or two, the costs to refinance may be too high to justify moving forward.

Getting a 30-year rate at 4.875 percent sounds like a great move. But if you save $180 per month, it will take nearly 20 months to pay back $3,500 in closing costs. That doesn’t sound like a great deal to me. You should be able to pay off your loan costs in well under a year.

If you roll your refinancing costs into the loan balance, you’ll be paying off those loan costs for the life of the loan. If you’re not going to either shorten your loan from 25 years to 15 years or 20 years, and your monthly payment isn’t dropping if the loan has a 25-year amortization schedule, then there is no point in going through a refinance.

For many people who have loans in the 5 percent range, it may be tough to justify refinancing at this point. One problem is that homeowners are fixated on the interest rate they’re paying rather than how much cash they’re spending.

I’m all about how much cash is leaving your pocket at the end of the month. If you start to look at it this way, I think your next step will become increasingly clear.

As a side note: mortgage lenders everywhere are raising the costs to get a loan — precisely at the time when you’d want those costs to go down. Instead, you can expect to be quoted higher origination costs, higher points (a point is one percent of the loan amount) and more fees.

The good news is that these costs are negotiable. That’s why you have to shop around with more than one lender. You should talk to three or four lenders, including a mortgage broker, a lender at a national bank, a credit union (if you belong to one or can join one) and a smaller local bank. By comparing costs from each of these lenders on an apples-to-apples basis, you’ll quickly learn how much you should be paying and will be able to negotiate more intelligently with lenders to get the best deal.

Jan. 19, 2009.