Interest rates continue to be a hot topic in the real estate world, and well they should. For most owners, the cost of borrowing far exceeds the original cost of the house. If we can sign some papers and get that cost lowered, even by a small amount, it's got to be worthwhile, doesn't it?

Maybe yes and maybe no. Let's look at an unusual situation:

You have lived in your home for many years and now have only four years remaining before the loan pays out. In addition, you plan to retire at the end of that fourth year, and the elimination of the loan payment will coincide nicely with your retirement. Your current balance is about $50,000.

Your interest rate is fixed at 9.25 percent, and your monthly payment is $1,234 before taxes and insurance are added. It hardly seems worthwhile to consider refinancing because there are only a few years left on the loan and you are comfortable.

What should you do? The answer is clear: Refinance immediately!

At today's rates, you could easily qualify for a 15-year fixed rate at about 4.5 percent. Beginning with the first month, your interest would drop from about $385 to $187, saving almost $200 the first month.

But what about closing costs? Ask your lender to calculate the interest rate you would need to accept in order to obtain a "zero-closing-cost" loan. Under this option, the lender charges you a slightly higher rate in exchange for paying all your out-of-pocket expenses and closing costs. The rate premium varies depending on the loan's amount and term, but usually it's around 70 basis points on a $100,000 loan and more on smaller loan amounts.

Because your loan is around $50,000, the rate premium might be as high as 100 basis points, or about 1 percentage point added to the rate. So instead of getting a rate of 4.5 percent for 15 years, your rate might be set at around 5.5 percent. Check with your lender for a specific rate quote.

When you compare that rate with what you are now paying, though, your savings will still be substantial.

But what about the four-year maturity date you were counting on? What happens to you now that you are retiring and have no regular income? Well, two things are working in your favor.

First, because your rate was lowered from 9.25 percent to 5.5 percent and because we stretched the repayment period from four years to 15 years, the monthly payment of principal and interest drops to $409, a much more manageable sum, even on a limited income. That payment change takes effect immediately, not when you retire in four years.

And second, because this loan has no prepayment penalty, you can still choose to pay it off in four years if you wish. By sending in $1,163 every month instead of the required $409, you will have the loan paid off in exactly four years. In so doing, you will have saved over $4,000 in interest payments.

But you still might ask: What about my age? Why would the bank approve a loan with a 15-year payback for a borrower who clearly intends to retire in four years? For two reasons:

First, it is against federal law to discriminate against a borrower simply on the basis of age. Regardless of your age, the lender must assume that you will be able to maintain your current standard of living based on your past performance to do so.

Second, you may decide to keep working or you may find another career that pays even more than you are making now. It is impossible to know what will happen four years from now. Many who retire find new opportunities.

This assumes that you have a good credit score and the income needed to qualify for the new loan, but with the required minimum payment dropping by almost two-thirds, it is likely that you will still qualify, even on a limited income.

Another solution: If you have four years remaining on your loan but could afford even higher payments than you now are making on the 9.25 percent loan, you might approach your community bank and get a fixed-rate loan for $50,000 to be paid back over 36 months with an interest rate of maybe 5 percent. Your payments would increase to $1,499, but the lowered interest rate would cause the debt to be paid off in exactly 36 months.

This solution would require minimal closing costs and would involve no intangibles tax, and you'd save even more in overall costs than you would by following the plan I described before this.

If you choose this type of short-term financing from your bank, I strongly recommend that you insist on a fixed rate for the term of the loan. Most banks will prefer that you accept a home equity product with a rate tied to prime. That's fine for short-term borrowing of maybe a year or less. But in your case, it is likely the prime rate will increase within the next several years. Find a way to lock in today.

 John Adams is a broker and investor. He hosts the "John Adams Radio Show," a call-in program dealing with homeownership and real estate, from 1 to 3 p.m. Saturdays on NewsRadio 640 (WGST). For more real estate information or to make a comment, visit www.money99.com.