Q.Now that mortgage interest rates are quite low, we have been exploring the idea of refinancing our current 7.5% mortgage, and want your advice on how to go about doing this. Are there costs associated with refinancing? Is there a formula that tells us whether refinancing makes sense?

A. In recent years, many homeowners have made refinancing an annual ritual. Interest rates – which are now at an all time low -- have been steadily dropping over the past several years, and consumers have taken advantage of these lower rates.

However, you should understand that when you refinance your current mortgage, you will probably have to attend a brand new settlement. Your refinance lender – even if it is the same lender who holds your current loan – has to start from scratch. The lender must obtain current financial information about you, contract for an updated appraisal of the property, and receive an updated title report. Just because everything was acceptable several years ago when you obtained your first mortgage, does not mean that everything is acceptable today. The only real difference between a purchase and a refinance is that there is no buyer or seller present at closing, and there will be no real estate broker involved.

You should shop around; contact several mortgage lenders and brokers to determine what interest rates you can obtain. Determine what the various rates will be for a fixed 30-year mortgage, and compare those rates to a fixed 15-year mortgage as well as to an adjustable mortgage transaction.

In the early l990's, many homeowners -- especially first time buyers -- obtained an adjustable rate mortgage (called an ARM), which would change at periodic intervals. Some ARMs would change on a yearly basis, while others would change every three years. Some ARMS would have the interest stay in place for 5 or 7 years, and then readjust yearly thereafter. Now that rates are very low, and if you plan to stay in the house for many years, you should seriously consider obtaining a new fixed rate mortgage.

When you contact a number of mortgage lenders, determine exactly what closing costs will be required. Consumers do not realize is that the lender -- whether it is your current lender or a new lender -- will want a brand new title search, will probably want a new title survey (unless it is a condominium) and you will have to pay for a new lender's title insurance policy.

Make a chart of all of the expenses. Determine if your lender will charge you any up-front points. A point is one percent of the loan amount, and if you were to borrow $180,000, each point you pay will cost you $1,800. Each point is the equivalent of approximately 1/8 of an interest rate. Thus, you may find a lender who will be offering 6 percent with one point, or 6-1/8 (or 6.125) with no points.

Obtain a mortgage amortization booklet so that you can determine exactly what your new monthly payments will be. There are many web sites which will provide you basic information on what your loan will cost. Point your browser to your favorite search engine, and type in “mortgage loans”. You will be amazed at the number of web sites that are interested in your business.

Let me give you an example.

Your current loan is approximately $180,000.00, and is at an interest rate of 7.5 percent. Your monthly payment of principal and interest (not including taxes and insurance) is $1,293.00.

If you obtain a new 30 year loan of $180,000.00, at 6.125 percent, for example, your new monthly payment of principal and interest will be $1,093, for a monthly savings of exactly $200..

If you want to pay a point, so as to further reduce your mortgage interest rate down to 6 percent, this will cost you $1,800.00. If your income and the equity in your home is acceptable to the lender, you may be able to add that point to your loan. You will now borrow $181,800.00, and your monthly mortgage payment ( based on the lower 6 percent rate) for this 30 year loan will now be $1,086 a month (principal and interest only). You now have a monthly savings over your old mortgage of $207.

If you plan to keep the house for any length of time, in my opinion it makes sense to take the lower interest rate, and to add the point or points which you will have to pay onto the new loan you are obtaining. Points for refinancing are generally not deductible for tax purposes in the year that you are paying them, unless the new loan is for the purpose of paying off improvements that you have made to your house.

If you currently have an adjustable rate mortgage, you will probably be thinking that the rates will be going down this year, and thus why should you bother refinancing?

This is a major dilemma. You are probably correct. If your existing loan is more than one year old the rates may very well go down at the next adjustment period.

But, there is no guarantee what the future may bring. Economists are already predicting that interest rates will probably start inching up slowly. Our economy appears to be recovering, but very slowly. The Federal Reserve Board has already dramatically lowered the bank interest rates to an all-time low, and it is not clear how much lower they can go – or will want to go. If and when mortgage rates increase, then your adjustable will follow on the upward path.

In my opinion, there is considerable merit in locking in a fixed 30-year rate at a lower interest rate; peace of mind is important in planning your financial future.

Should you consider obtaining a new adjustable mortgage at rates that can be as low as 5% for the initial term?

Again, much depends on your own personal circumstances and on the adjustable rate you can get. If you can obtain a three year ARM for less than 6 percent, and absolutely know that you will sell your house within that three year term, then it makes sense to consider an ARM.

However, if you intend to keep the house for more than three years, in the fourth year your lower interest rate might start jumping as much as 2 percent per year, and ultimately you may find yourself back in the low teens for your interest rate. This should not be acceptable to you, especially you can lock in now a lower rate for a long period of time.

You should sit down with all of the facts, and spend an evening with your calculator and your amortization book. Basically, do the numbers. You also have to plug in the costs of the refinance settlement. There will be a new title search, and a new lender’s title insurance policy. Your settlement attorney will also charge you a settlement fee. All of these numbers have to be taken into consideration to determine if it really makes sense to refinance.

You should also contact your current mortgage lender. Some lenders provide a refinance program which does not involve a lot of up front closing costs. Basically, your current lender should not need a new title search or a new survey; all they have to do is record a modification of your existing mortgage documents among the land records in the jurisdiction where your house is located.

We used to quote a rule of thumb that one should refinance when rates drop at least 2 percent from your current mortgage. With the tremendous volatility of the financial marketplace, this 2 percent rule of thumb does not always makes sense. Since rates are clearly low, everyone should considering refinancing immediately. A savings of $207 per month -- or $2,484 each year -- should not be overlooked.