The chance to refinance a mortgage at a lower interest rate always gets a homeowner's attention. But it's not always the right decision. Determining when to refinance doesn't involve hard and fast rules as much as it depends on your goals.

Your Refinance Goal

Getting a mortgage rate you can boast about at cocktail parties probably isn't the soundest reason for refinancing--especially if you're unlikely to recoup your costs. Reducing the interest expense is the most common goal of a refinance. But some homeowners are looking for cash flow--a lower monthly payment can be obtained by stretching out the mortgage over a new 30-year term or possibly purchasing an ARM product. Still others are looking to cash out some equity for debt consolidation or investment. Mortgage borrowing is often the cheapest financing available for such endeavors.

When to Refinance

How do you know if this is the right time for a new mortgage? You know mortgage rates are low, but there are other considerations. Mortgages cost money to originate, and homeowners are often advised 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 $200, it would take 20 months of lower payments to recover $4,000 in closing costs.

Refinancing for Savings

This isn't a bad "guesstimate" but isn't really valid for measuring savings. Actual savings involves paying less interest, not just a lower payment. When 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 may result in higher interest expense over the life of the new loan. Mortgage calculators can show you what the total interest expense will be with a refinance and how much you actually save (or don't save).

Refinancing for Affordability

Some people refinance simply to lower their monthly mortgage payment and make their home more affordable. A lower mortgage rate and/or a longer loan term both help accomplish this. As long as the homeowners understand they may not be minimizing total interest expense, affordability can be a valid reason for extending the loan term.

Refinancing for Safety

Some borrowers refinance to leave the uncertainty of their ARMs behind and get a safe, fixed-rate loan even if it costs them more. However, in some cases, homeowners with ARMs would be better off keeping 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.

When NOT to Refinance

If you aren't expecting to be in your property for many years, refinancing may not be for you. Historically, interest rates don't increase when the economy is down--they generally stay low until a recession ends. If you're doubtful of recouping the costs of a new loan it makes little sense to go through the expense of getting it.

Opting for a No-cost Refinance

As a rule, so-called "no cost" refinances aren't the best deals available. But when you don't plan to keep your home for long and can get a no-cost refinance at a lower rate than your current mortgage, the decision to refinance is a no-brainer. Getting something for nothing is never a bad deal.