When to refinance your mortgage
By Don Taylor, Ph.D., CFA • Bankrate.com

The chance to refinance a mortgage at a lower interest rate is sure to get a homeowner's attention. But it's not always the right decision.

Having bragging rights at the neighborhood picnic isn't a reason to refinance. Instead, it's good to put some thought behind the timing of your decision.

Multiple refinancings can reduce your overall financial benefit. Refinancing junkies who always migrate to the next low rate pay a hefty price by leaving a trail of closing costs in their wake.

In some cases, a mortgage refinance makes sense. In other cases, it may be more prudent to stick with your current mortgage.

What's your goal?
Before deciding whether to refinance, you need to determine what you want to accomplish. Remember, a refinance doesn't pay off the debt; it just restructures it, often at a lower interest rate and a different loan term than the current mortgage.

Reducing the interest expense is the most common goal of a refinance. But some homeowners also appreciate the ability to extend the loan back out to 30 years, reducing the monthly payment.

Debt consolidation is another goal of refinancing. If you have both a first mortgage and a home equity mortgage, combining the two mortgages into one fixed-rate mortgage levels out the payment over the loan term.

Tip: Do it once

Ideally, you only want to refinance once on your current mortgage. While no one can tell you with certainty where interest rates are going, Bankrate's weekly Rate Trend Index and Mortgage Analysis will keep your finger on the pulse of where interest rates are headed. You can have them delivered as a weekly e-mail so you don't have to remember to look for the columns.

Many homeowners refinance because they want to get out of (or into) an adjustable-rate mortgage. In high interest rate environments, homeowners are attracted to ARMs because they typically are at a much lower interest rate than a 30-year fixed-rate mortgage.

On the other hand, in low interest rate environments, the differential between the fixed-rate and the ARM isn't as great, and homeowners like the security of locking in a fixed rate over the mortgage term.

When to refinance
After clarifying your reasons for refinancing, you need to consider whether the timing and circumstances make this the right time to get a new mortgage.

Usually, you have to plan to be in the house for awhile for refinancing to make sense. According to Bankrate's 2008 closing cost survey, the national average for closing costs on a $200,000 loan is $3,118. The fees in the survey don't include taxes, insurance or prepaid items such as prorated interest or homeowner association dues.

When weighing whether to refinance, homeowners typically are urged to consider how many months of lower payments it will take to recoup the closing costs of the new mortgage.

For example, if your monthly payment goes down by $156, it would take 20 months of lower payments to recoup the average closing costs. Bankrate's refinancing calculator lets you input your costs and the loan terms to calculate the months it will take to recoup your costs.

Tip: Know where you stand

Before you refinance, know where you stand with your current mortgage -- including the loan terms and interest rate, as well as relevant factors such as your credit score and whether or not the loan has a prepayment penalty.