NEW YORK (CNN/Money) -
With mortgage rates still treading at historic lows, it's tempting to think happy days are here again for homeowners wanting to refinance.
That's not necessarily the case. Much depends on your time horizon, whether you've already refinanced in the past two years and your overall financial picture.
But if you do decide to jump in, you should act fast. "The optimal thing to do is to lock in your interest rate," said Keith Gumbinger, vice president of mortgage tracker HSH Associates.
That's because he anticipates an upward trend in rates in the coming months, despite what may be brief periods of declines. Those intermittent drops, such as the ones we've witnessed in the past month, are not a signal that mortgage rates are on a straight path south. Rather, they mirror what he describes as the "fits-and-starts" nature of the U.S. economic recovery.
Who should refinance now?
There are two clear instances in which a refi may benefit you now:
You've just come out of a two-year coma: If you were busy living your life and you missed the whole refinancing boom in 2001, "the window of opportunity is open for business at least temporarily," Gumbinger said.
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Say you bought your home two years ago with a $150,000 30-year fixed rate mortgage at 8.52 percent. If you refinance now to another 30-year fixed-rate at 7 percent, you'd reduce your monthly payments by $173 and save more than $35,000 in interest payments over the life of your loan.
A bank or mortgage company typically takes between 30 days and 45 days to process your refi package, but be sure to ask your lender how long it takes the company to close loans and be sure to purchase a lock on the rate you'd like for at least that period of time. There's usually a standard lock-in period that may be free, but beyond that you might need to pay for an extension. Ask what your options are. There is usually a higher cost for a longer lock-in period -- you may get a slightly higher rate, or have to pay a percentage of a point or a cash fee.
The old rule of thumb used to be that in order for a refi to make sense you'd need to secure an interest rate that's at least 2 percentage points less than your current one. But that's not really the case, especially if you plan to stay in your home for many years, Gumbinger said. "The longer the time you live in your home, the less interest-rate differential you need," he said. That's because you're likely to live in your home well past your break-even point -- the time it takes for your savings to offset your out-of-pocket refi costs. A refi typically costs up to 3 percent of the loan value, he said.
If you plan to stay in your home for two to three years, it doesn't make sense to pay for a refi, but you might benefit from a no-cost refi, even if it cuts the cost of your loan by less than 2 percentage points. You don't get as favorable a rate in a no-cost refi, but the savings are immediate. Essentially, said Gumbinger, "you can have a lower rate for free."
(For a step-by-step guide to refinancing, click here.)
You've been ARMing yourself to the teeth: Those with adjustable-rate mortgages in the past few years have done quite well for themselves. Short-term interest rates, to which ARMs are tied, have been near 40-year lows and probably won't get much lower. So if you plan to live in your home for many more years, Gumbinger said, "It's time to take your winnings off the table." In that case, you might want to refinance to a fixed-rate mortgage, rates for which are still near historic lows.
The key with all refinancing decisions is to get a mortgage product that best suits your time frame, he noted.
Who shouldn't refinance now?
There are a couple of instances when refinancing may just be an exercise in paper-shuffling, or worse, a slippery slope to financial trouble.
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You've been there, done that: "If you've refinanced in the last 18 months or two years, this movie's a rerun," Gumbinger said. "Rates aren't at compellingly low levels." In other words, the rate you can get today compared with what you got in recent months may not be low enough to justify the administrative hassle or fees.
You're ARMed, but moving: You've enjoyed the low monthly payments of a low-rate ARM, but you're planning to sell your house in the next year or so. Again, a refinance may not be worth the hassle. If you're going to be staying another five years, however, you might want to get a hybrid ARM that's a 5/1 -- one in which you enjoy a fixed-rate for five years after which the rate becomes adjustable. But factor in your refi costs to see if it makes sense for your bottom line.
You view your house as an ATM machine: If you're strapped for cash and your home has appreciated in value, a cash-out refi may seem highly attractive. But know thyself before acting. A cash-out refi lets you take out a larger mortgage than your existing one and pocket some of the equity you've built up. If you get a favorable interest rate, your monthly payments may go down and you'll have cash on hand to pay off your debts. But if you're a profligate spender, getting control of your spending is a much smarter financial move in the long run than constantly refinancing your house, Gumbinger said. That's because by constantly pulling equity out of your home you squander what for many people is their biggest financial cushion to pay off credit cards and other debt. And you run a higher risk of owing the bank money when you sell your home if house prices in your neighborhoods depreciate after you refinance.
(Click here for other scenarios in which a refi may not make good financial sense.)