New York (CNN/Money) - Just when people thought they couldn't go much lower, mortgage rates keep dropping.

If rates around 5 percent have you thinking it's time to refinance, you're not alone. Demand for mortgages keeps going strong, with the bulk coming from refinancings.

Here's what to consider as you think about joining in.

Refinancing can save you a bundle over the life of your loan, but it will cost you some up-front fees.

First to consider: Will you owe a pre-payment penalty on your existing loan if you refinance? That can run about 1 percent of your loan. Then there's title insurance, attorney fees, origination or administrative fees, the cost of running your credit profile and appraiser fees. All told, you should expect to pay about $2,000 to $3,000 in fees.

Plenty of people are finding that they can avoid most of the up-front costs with so-called "no-fee" or "no-cost" loans. But read the fine print carefully. There's rarely any free lunch, and refinancing is no exception. No-fee loans may come with higher interest costs than the traditional variety.

Bottom line: shop around and figure out if you're better off paying now, or over the life of the loan.

This may be a tough question for anyone to answer, especially families in so-called "starter homes" who hope to move to more lavish digs in five or six years. While there's never any way to pin down what the future holds, it is important to make a best-guess scenario about what lies ahead.

You want to know that you'll stay put long enough to recoup whatever costs you paid to refinance. If you're saving $200 a month on a new loan but it cost you $3,000 in fees, you won't break even for 15 months.

Thinking about your future will also help you pick out the best type of mortgage. Sure, the rates on 15- and 30-year fixed rate loans are low. But look at adjustable rate mortgages (or ARM). A five-year hybrid loan -- in which you pay fixed costs for five years before rates adjust every year thereafter -- are now averaging 4.61 percent. If you think you'll be out of your home in the near future, you may save even more money by opting for an ARM.

That said, there's the emotional cost of refinancing. Fixed-rate loans provide a tremendous amount of security for those who want to go to sleep at night knowing that their monthly fees won't skyrocket in the future. In other words, choosing the right mortgage is going to be a mix of practical and personal tolerance for uncertainty.

"Someone who will be out of their home within five years to seven years can save some money with an ARM," says Keith Gumbinger, vice president of HSH Associates. "But you have to be aware of the reality that interest rates are likely to be somewhat to significantly higher in three years, five years, 10 years down the road from today."

Be aware that once you refinance, you re-extend the term of the loan. So you could well wind up paying more in interest over the life of the loan. In fact, in some cases, says Gumbinger, refinancing "can wipe out any savings and cost you more in the long run."

Homeowners who are more than a quarter of the way into the term of their loan -- say about four years on a 15-year term or seven years on a 30-year loan -- should be careful about refinancing. To determine what it will really cost, check out CNN/Money's refinancing calculator.

It's important to know why you are refinancing. Is it to free up cash? To lower your total interest costs? Or do you want to shorten the term of your loan?

Your goals should help you determine the best course of action to take. For example, if you want to pay your loan early and save interest, it may be far easier and cheaper to make one extra month's payment a year without the trouble or expense of refinancing.

Consider: a person who has a 30-year, $250,000 mortgage at 5.71 percent will save about $56,000 in interest and pay off his loan five years early if he makes biweekly mortgage payments from the beginning of his loan.

If you don't have the cash to make a month's extra payment in one lump sum, you can achieve roughly the same results by dividing their monthly payment in half and paying it every two weeks -- the equivalent of 26 bi-weekly payments a year. For more on these so-called "bi-weekly payments," click here.