Based on the information that you provided I would recommend that you refinance your mortgage. By refinancing into a 20 year mortgage you reduce your mortgage rate and eliminate a year from your original loan term. Lowering your mortgage rate and reducing your mortgage term both save you thousands of dollars in interest expense over the life of your mortgage and you can save even more money if you continue to overpay, or accelerate, your loan.
To answer your question about if you should roll your closing costs into your loan, the answer depends on your financial objectives. Including your closing costs in your mortgage amount moderately increases the size of your loan which slightly increases your monthly payment. You could also get a "no-cost" refinance although you typically pay a higher interest rate with a no-cost refinance. If you pay for your refinance closing costs out-of-pocket, your mortgage amount and/or interest rate will be lower, which reduces your monthly mortgage payment and saves you interest expense over the life of the loan. I encourage you to use our Refinance Calculator to compare refinance options with different mortgage amounts, interest rates and closing costs to determine the loan that is right for you.
Finally, 4.125% is a very high interest rate for a 20 year mortgage. There are multiple lenders on the FREEandCLEAR rate tables offering 20 year loans with interest rates lower than 3.500%. I always recommend that borrowers shop multiple lenders to ensure that you receive the best terms on your loan. You can review lenders in your area by clicking INTEREST RATES Select "20-Year Fixed" under "Loan Type and Term" in the Refine Your Search menu to view mortgage rates and fees for lenders offering 20 year mortgages. We advise you to contact at least four lenders as comparing multiple lenders is the best way to save money on your mortgage.