Q: I am a widow who will be 64 years old in a few days. My adult child and her family live with me. I pay all the bills, so I’d like to refinance if the rates get low enough. I have a loan with a 6.25 percent interest rate and I owe $103,000. I have 25 more years left to pay. Will you let us know when best time to refinance is, please?

A: While we’d love to have a working crystal ball and be able to tell you when you should refinance your loan, we can’t. But here’s some information that will help you make a smart decision about refinancing.

During the first 10 to 15 years of a mortgage loan, a homeowner pays mostly interest each to the mortgage lender. As a homeowner keeps that loan, each year a greater percentage of each monthly payment goes towards paying down the principal on the loan.

In your case, you’re still at the stage where your monthly payment is mostly interest with a little bit of principal. From a historical perspective, your 6.25 percent interest on your loan is quite low. The key to refinancing is not just whether you can reduce your monthly payment, but if you can save yourself real money over and above the costs involved in refinancing the loan.

If you’re able to refinance your loan and lower the interest rate by about 1 percent (to 5.25 percent), you might reduce your monthly mortgage payment by about $80 per month. But if the costs to refinance the loan are $2,000, it will take you over 2 years to break even on the refinance. In addition, if you refinance into 30 year loan, you will add 5 more years of interest payments, virtually erasing your savings.

Some mortgage lenders will try to tell you that you won’t have to pay cash at the closing. To get there, they’ll simply increase your loan balance by the amount of your closing fees. If you were to do that, you would pay interest on the closing costs (in addition to the closing costs themselves) for the next 30 years.

Here’s an easy way to compare a refinance on an apples-to-apples basis: Ask the lender to tell you how much the monthly payment would be if you refinance on a schedule that will still pay off your loan in 25 years. Once you have that payment amount, you can compare it to your current payment amount to see what your actual monthly savings will be.

Then you need to know what the specific closing costs will be to refinance. If the savings from the new monthly payment will allow you to recover the closing costs in 9 months or less, then refinancing might make sense. If you have to wait three years to pay off the cost of the refinance, then you have to understand you won’t really reap the benefits of the refinance for some time.

Watch for interest rates to drop back below 5 percent. At a rate of 4.5 percent, the monthly savings might be so great that refinancing will be very attractive. Also, if you plan to live in this home for the next 20 to 30 years, the benefits of refinancing could be significant.

You’ll need a good mortgage lender to work with, and you’ll want to be sure you understand all of the costs and your expected savings before you sign any document. Know that many lenders have recently raised their fees to refinance. But these fees are negotiable, and you should shop around so you know where to negotiate.

Good luck and happy birthday.

March 5, 2009.