When to refinance your mortgage

While this is not a bad rule of thumb, it doesn't really measure your savings. Savings come from a lower interest expense, not lower monthly mortgage payments. Bankrate's refinancing calculator shows the change in total interest expense, too.

You'll see that if you get a lower interest rate but extend the mortgage term, you can wind up spending more in interest. For example, replacing a mortgage that has 20 years remaining with a 30-year mortgage will result in higher interest expense over the life of the new loan.

To figure out whether refinancing with a loan term extension will help you save, do two calculations: one where the new loan has the same term as the old loan, and one where the new loan is the length of your planned refinance. Compare the interest savings to see if refinancing accomplishes your financial goal.

Some people refinance simply to make the monthly mortgage payment more affordable. A lower interest rate and/or a longer loan term both work toward lowering the monthly payment. As long as the homeowners understand they may not be minimizing total interest expense, affordability can be a motivation for extending the loan term.

While short-term savings are important, they are not the only factor to weigh when considering a refinance. Refinancing to get out of an ARM, piggyback mortgage, interest-only mortgage or other onerous mortgage provisions may be reason enough to take on a refinancing.

However, in some cases, homeowners with ARMs would be fine sticking with their loan, especially if they don't plan on being in the loan long term and the reset rate on their mortgage isn't financially threatening.

The Mortgage Professor, Jack Guttentag, has refinancing calculators on his Web site that allow homeowners to estimate the benefits of switching to a mortgage with new terms, including a calculator that can help reveal whether it makes sense to convert an ARM to a fixed-rate mortgage.

When not to refinance

If you don't plan to be in the house for very long, you should probably stay in your current mortgage. Here, the number of months it takes to recoup closing costs becomes the more important calculation done by the refinancing calculator.

You also should reconsider a refinance if you're underwater on your mortgage at this time. Borrowers in this situation are unlikely to find a lender willing to offer good terms on a refinance. However, it is possible that a present or future government program could allow you to refinance at more favorable terms. Stay tuned to Bankrate to stay current on government programs for homeowners.