Here's what I have just calculated given 4 different scenarios.

1. Original. Loan 225k, 3.625%, 20 yr. Total interest 91.7k

2. Current. Original + 120/mo prepay: total interest 80.1k. Savings of 11.6k. However, if I assume 7% market growth, in 18 years this 120 prepay gives to 26.5k of interest. In current market I'm better off right now

3. New Offer #1: 3.5% for 20 yr. Not worth a candle.

4. New Offer #2: 3.125% for 15 yr. That's where stuff gets interesting. Total interest on NEW loan = 56.2, add 4k of interest I already paid = 60.2k interest. Extra pay compared to (1) is 220, to (2) is 100.

- If I take this 220 extra pay compared to very original scenario and assume 7% investment, in 15 years I will have 31.4k interest, but in 20 yr (original loan), it it 63k

- If I take this 100 extra pay w.r.t. (2), I get 14.3k in 15 years interest. However, I still get 5 more years of itemized taxes (see above why).

All in all, current loan + 1/12 pre pay works better for me, and more importantly - flexible. I can immediately take out $120 prepay when market stops going 1.5% up and down on any day and put it into market. Plus tax breaks a little better with current plan.

Math rules. Emotions don't. It does look very cool in words - wow, you save 30k on interest if accept 3.125%, but in long run market wins. Also, extra money from bonus (discretional, hence not in budget really) can go towards either 401k or taxable Vanguard [there are very solid reasons why not maxing 401k just yet]

Comments? ideas? Did I miscalculate stuff?