Mortgage interest rates have been on a roller coaster ride in recent years. When rates came down significantly in the mid- to late-1990s, many homeowners with older fixed-rate mortgages sought refinancing with a lower rate loan. Some with adjustable-rate financing sought to lock in a low fixed rate for the long term or refinance to a lower variable rate. Recent rate cuts may provide another refinancing opportunity. 

Refinancing a home mortgage can result in a significant monthly saving in mortgage costs. A rule of thumb says that refinancing makes sense if the current mortgage rate is at least two percentage points lower than your existing mortgage rate and you plan to stay in the home for at least two years. This "rule" is based on the fact that you will incur new closing costs by refinancing.

In fact, the decision to refinance should not be made solely according to an arbitrary rule. Rather, it should be made only after undertaking a careful financial analysis.

The costs of refinancing ~~ prepayment penalty (if any) on the old mortgage, application fees, appraisal costs, "points" (prepaid interest), survey costs, recording fees, among other expenses ~~ need to be taken into account. Some of these costs may be waived or refunded by the lender. You may also be able to save additional closing costs by refinancing with your current lender.

After reviewing the costs of refinancing, weigh the income-tax consequences of refinancing. Be aware that refinancing may yield some unexpected tax write-offs.

• If you pay a prepayment penalty, it may be deductible as mortgage interest.
• If you incurred any mortgage points that you couldn't deduct in full when you took out the old mortgage, the points had to be amortized and deducted over the life of the mortgage. When you refinance that mortgage, the remaining unamortized points may be deducted in full.

Also consider that if your refinancing means paying less annual interest, you will have a smaller mortgage interest deduction for tax purposes. Result: You may have to increase your withholding or estimated tax payments to account for the change.

Also, if you are paying points on the newly refinanced mortgage, be advised that, unlike points paid on your original home mortgage that may be fully deductible in the year paid, your refinancing-related points are generally amortizable over the life of the new loan. Deciding whether to refinance your mortgage requires careful analysis, we would like to help.