New York (CNN/Money) -
Just when you think mortgage rates can't go any lower, they prove you wrong.
The average rate for a 30-year fixed stands at 5.99 percent -- the lowest level ever -- as of Sept. 25. Rates for a 15-year fixed average 5.41 percent -- another record.
With the cost of borrowing so low, homeowners nationwide have been rushing to refinance, a process that allows you to trade in your old loan for a new one with lower monthly payments.
But before you race to join them, make sure you know what to ask so you pick the deal that's best for you. Here are five questions you should have answered before you sign on the bottom line.
What's my break-even point?
First and foremost, the decision to refinance depends on whether it's worth your while from a financial standpoint. To determine that, you'll need to know how long it will take for your monthly savings to offset your closing costs. In other words, when will you break even?
In general, the bigger the loan, the faster the payoff.
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To determine your break-even point quickly, divide your monthly savings into your expenses to determine how long it'd take to recoup your costs. (Use our mortgage calculator to figure your monthly costs and compare mortgages.) If you save $200 a month with a new loan and you pay $2,000 in expenses, it would take 10 months to break even.
The lower the break-even point, the better. But some experts say at the most, you shouldn't wait more than three years to break even because there's a strong likelihood that you could move or swap mortgages again.
Should I choose a fixed-rate mortgage or an ARM?
When you refinance your loan, you'll have to select from an ever growing number of financing options.
You've got 15-year and 30-year fixed-rate mortgages, in which your rate never changes. And then you've got the adjustable rate variety (or ARMs), which offer lower introductory or "teaser" rates for the first 1-, 5- or 7- years. After that period, however, ARM rates will change (usually up) along with the economy and benchmarks set by the Federal Reserve.
Neither loan type is better than the other. But only one is right for you. Knowing which depends on a slew of factors, including how much longer you have to pay off your loan, how long you plan to stay in your home and your goals for refinancing in the first place, notes Fritz Elmendorf, spokesman for Consumer Bankers Association.
Are you hoping to cut your monthly payments or the amount of interest you will pay over the life of your loan?
"If you only are concerned about the monthly payment, then getting into the 30-year fixed rate loan will achieve that. But if you're able to afford to pay more each month and more oriented to paying down principal, your options get more complicated," said Elmendorf.
For example, moving to a 15-year fixed loan from a 30-year will cost you more out-of-pocket per month, even with lower rates. But you'll pay off your mortgage sooner and save thousands in interest fees overall. Another option? Switch to an ARM that's fixed for the first five years to secure even lower rates and plow savings into extra principal payments, Elmendorf adds. This could let you pay off your principal even faster.
The rule of thumb: If you're thinking about leaving your home in five years or less you should snag the lowest rates possible with an ARM. For those staying put, however, the fixed-rate varieties are a better bet, offering the assurance that you'll never pay more in the future.
For more, see "Is your mortgage right for you?"
What's the best way to compare refi options?
If you're choosing between several fixed rate mortgages, pay close attention to the APR. That's short for "annual percentage rate" and it includes not only the interest rate you'll pay but any fees, mortgage insurance and points. (A point is equal to 1 percent of your loan amount.)
But if you're looking at an adjustable mortgage, where rates will be reset in the future, APR numbers won't work, said Tim Malburg, president of Capstone Mortgage Company in Wilton, CT.
That's because when lenders give you an APR for an adjustable rate, they're using best-guess estimates of what your underlying interest rate will be in the future and those estimates can be way off the mark, says Malburg.
Instead, Malburg advises clients who are shopping around for adjustable-rate mortgages to compare break-even periods for various loans to determine when they'll recoup costs.
Is no-cost refinancing good for me?
When it comes to refinancing, it doesn't take long before homeowners are flooded with an array of fees, including title insurance and searches, appraisals, credit reports, overnight mail, attorney costs, escrow accounts and bank fees excluding points that you may pay to lower your interest rates . Those can add up fast -- typically $1,900 on a $200,000 loan and for every additional $100,000 loan, expect to add $200 more in closing costs, says Malburg.
But these days, as the mortgage market stays competitive, some lenders are offering no-cost refis. You don't have to pay points or fees.
A great deal, right?
Not so fast. It's time to look at the fine print. No-cost loans may pick up the fees, but your lender is going to charge you higher interest rates -- typically about 0.25 percent more -- than you'd otherwise pay if you shouldered those costs yourself. Eventually, the higher rates surpass what you would have paid in expenses. For that reason, no-cost refi's tend to be better for folks who don't plan on staying put for long.
"If you're going to move next year, it's hard to get enough savings out of a lower rate, but it depends on how much money is involved. The bigger the loan balance the faster the savings add up," said Elmendorf.
For more on the hidden pitfalls of refinancing, see Six Dirty Secrets of Mortgage Loans.
What's the lock-in period?
Sure, those low rates look tantalizing. But these days it's taking a long time -- about 45 days -- to close on a refi, notes Malburg. For that reason, it's imperative to know how long that low rate is good for.
Unfortunately, says Malburg, too many individuals don't ask. That can spell disaster because individuals may sign up for a refi and end up paying higher rates than they thought by the time they close. I