I've been struggling with a decision for a while and hope that smarter people can prevail and provide some input:

My better half has a condo worth about $77k (according to Fanny Mae) and she has $112k left on her loan at 7.25%. There are 25 years left on her 30 year mortgage.

She now has the option to refinance through her lender (has been confirmed), she can either do a 30 year refinance at 4.625% and save $211 per month OR she can do a 20 year mortgage at 4.5% and save about $73 per month on the loan.

Does it make sense to take a 30 year mortgage and pay it off as if it was a 20 year! even though the value is underwater?

The kicker is that she is planning on moving in with me and rent her place out (after a refi goes through) so if she took the 30 year there's a good chance more of her mortgage expense will be covered by the tenant's rent. In addition, she has student loans which will go up in interest! so she would like to pay them off with savings from the refinancing monthly payment.

I know there's a ton of issues mixed into the facts above, but would it be better to take the 30 year refi, maybe make higher payments and also use some savings to pay off more student loans OR should she opt for the lower total expense with the 20 year loan??

Any and all input is welcome and very appreciated!!

Refinance to a 30 year, its a no-brainer for me.

First, if your mortgage payment consists of principal and interest, only the interest is an expense. The rest is just your money being converted from cash to equity in your condo. In your case, cash that can be used to buy anything is being locked into an underwater condo you cannot access.

Obviously, the 20 year has a lower rate and less interest expense. But only .125%, which on $112k loan is only $140 per year. I'd happily pay the extra .125% to be able to keep more cash. Also, as you said the lower payment would mean the monthly rent would likely cover the full amount.

+1 to what bill says. One way to look at it is that taking the 30 year loan means you are paying $140 per year for the flexibility to take 10 extra years to pay. Right now that is reasonable. If rates go up any time in the next 20 years or if anything happens to increase her expenses, that will look like an unbelievable bargain.