During any period of low or falling
mortgage rates

, opportunities to refinance will present themselves to many
borrowers. There are several reasons why homeowners choose to
refinance their mortgages, the main objective being to lower their
monthly payment.

Yet the refi process isn’t always simple or straightforward. To
help you decide and prepare for your
refinance

, we wanted to answer the five most-common refinance questions.

Below are your top 5 mortgage refinance questions answered:

1. Will I benefit from a refinance?

Too many mortgage professionals and personal finance writers
make the mistake of using an oversimplified break-even formula to
determine how long it takes for monthly savings to offset the cost
of a mortgage refinance.

Their calculation is simple (yet flawed): subtract your new
payment from the old payment to get your monthly savings, then
divide the cost of refinancing by that amount, and voila! You get
the number of months it takes to break even.

The problem with this logic is that your reduced payment is also
achieved by taking the remaining balance of your original loan and
stretching out the repayment period over a new term (say, 30
years). If you have been paying on a 30-year, 6 percent mortgage
for five years and refinance the remaining balance over a new
30-year term (at the same rate), your payment goes down. But it’s
not because of any savings you accrued, it’s because you’re
essentially stretching your 30 year loan out over 35 years.

A better way to realize your true savings is to take a look at
HSH.com’s
“Should you refinance”

calculator. It gives you the simple “break-even” calculation so
that you know how long it takes to recoup your refinance costs, but
it also provides additional information in the “Mortgage Analysis”
section that tells you how much you’d pay over the life of your
unchanged loan versus what you’d pay if you refinance to current
mortgage rates.

This is the best way to determine if a refinance will be
beneficial to you.

2. Should I speak to my current mortgage lender about
refinancing before shopping around?

Actually, you should probably speak to your current lender after

getting refinance quotes from other lenders. Most
mortgage lenders

have retention programs they use to head off homeowners before they
refinance with someone else.

Often, however, the deals they offer are not as good as what you
may find by shopping on the open market. In addition, your mortgage
lender has less incentive to close your refinance quickly because
it already has you as a customer.

Janet Walker of Phoenix, Ariz. did get her current lender to
lower her mortgage rate, but not until after they made her work for
it. “I called to get my mortgage balance because I wanted to look
into refinancing. My lender called me the next day offering to
lower my rate. But then they said it would involve a whole
application process and paying for an appraisal, and the rate they
offered wasn’t the best available. I shopped around and told them
I’d refinance elsewhere if they couldn’t match a better deal that
I’d found. They finally did, but it took a while to close the
loan.”

3. Can I refinance if my home’s value has
dropped?

That depends. If your current mortgage is a government-backed
loan like FHA or VA, you can probably get a streamlined refinance
and your home’s value will not be a factor. If your mortgage is
owned by Fannie Mae or Freddie Mac, you may be able to refinance
through the Home Affordable Refinance Program (HARP), even if you
owe more than your home’s value.

Other options are conventional-to FHA refinancing (allowed up to
97.5 percent LTV), conventional-to-VA refinancing (to 100 percent
LTV), or “cash-in” refinancing, in which you pay cash to reduce
your mortgage balance when you close on your refinance. If
refinancing means adding mortgage insurance or funding fees, be
sure to include those amounts in your calculations to make sure
that refinancing improves your financial position.

4. Is refinancing for the lowest payment always a bad
idea?

Many, many people have made refinancing decisions that they
regretted because they based their decision solely on lowering
their monthly payment. Ask most people who took out Pay Option ARMs
with those tempting 1 percent payments how they feel about them
now, and you’re likely to get an earful of expletives! But
refinancing for a lower payment is a valid choice as long as you
know what you are getting into and have plans to deal with the
consequences down the road.

If money’s tight, and the payment on a 5/1 hybrid ARM gives you
the breathing room you need for now, you’ll need to determine the
possible reset rate in year six and plan accordingly. If
refinancing helps you out of a jam now, it’s OK that it costs more
in the long run as long as you understand that and make the choice
willingly.

5. Should I go with a no-cost refinance?

There really is no such thing as a no-cost refinance. Your costs
are either rolled into your balance, paid by you, or absorbed by
the lender in exchange for you accepting a higher mortgage rate.
Not that it’s necessarily a bad thing–but if you want the lowest
mortgage rate and the best long-term deal, you’ll have to pay some
fees.

Mortgage Professor Jack Guttentag says that there are several
ways to shop for a mortgage. One is to indicate the rate that you
want and ask each lender what it would cost. You could look for
upfront mortgage brokers (UMBs) which operate by charging an agreed
upfront amount and shopping wholesale lenders for the best
deal.

Or, you can ask every lender that you deal with to price its
loan that way. “A borrower can take the initiative to convert any
broker into a UMB. They negotiate a fee, and then the broker finds
the best deal available,” says Guttentag. You can ask several
lenders what their best mortgage rates are for the amount you wish
to pay. Get Good Faith Estimates in writing and go with the lender
offering the best terms.