THINKING OF REFINANCING your mortgage? To find the best deal, you need to do your homework and be smart about your options. Otherwise, your refi just might cost you significantly more than it should. So consider this your crib sheet. We'll give you the lowdown on how the system works, so you re better equipped to get the best deal possible.

Timing Isn't Everything

If you're worried that mortgage rates are soon going to rise to the point where refinancing is no longer appropriate for you, you obviously want to lock in a rate as soon as possible. Then, once you have a rate locked for, say, 45 days, probably the best thing to do is to ignore the direction of interest rates. After all, should rates actually drop, you're likely to wind up flagellating yourself outside your lender's office. (To find out if refinancing makes sense for you, based on today's rates and your current APR, crunch the numbers in our Refinancing Worksheet.)

On the flip side, if you truly believe that rates are going to fall, then hold off on locking in a rate. What you most likely don't want to do is get involved with what's known as a "float down" option, which is essentially an opportunity to pay for the privilege of getting a lower rate should rates fall while you're still refinancing. As tempting as these offers might sound, they aren't free. In fact, they'll often cost you another one-eighth of a percentage point on your interest rate. In that case, mortgage rates would have to fall at least one-fourth of a point to make this deal worthwhile. And over a short period of time, that's not likely to happen.

Bottom line? You'll make this process much easier on yourself if you don't worry too much about the direction of interest rates. Instead, find a rate that will save you some money and lock it in. And, keep in mind, while it may take a little time for rates to drop, rate increases happen much more quickly.

A Simple Plan

When thinking about refinancing, always start with your current lender. Should your original lender still be servicing your loan (meaning that it hasn't been sold off in the secondary market to, say, Freddie Mac or Fannie Mae), you just might be able to refinance with a simple adjustment to your current mortgage. Should you be eligible, your lender would modify your loan by issuing a new rider allowing you to pay a lower interest rate for the remainder of your term. There's very little paperwork involved and very little cost usually this can be done for a couple hundred bucks.

If you have a conforming loan (under levels set annually by Fannie Mae and Freddie Mac) and if you've lived in your house for at least a couple of years, chances are your loan has been sold off. If that's the case, consider instead a "streamlined" mortgage. This is a quick, simple and cheap way to refinance your loan, and most major lenders offer some form of it. The paperwork required with a streamlined mortgage is considerably reduced, and often certain requirements, like an appraisal and application fee, are waived, saving you time and money.

Of course, there are a couple hurdles you're going to have to jump over to be eligible for a streamlined refi. For starters, this service is typically only available to people who want to refinance their mortgage for the amount remaining on their current loan. You also typically need to have at least 20% equity in your home and flawless credit, so if you've recently missed a few payments on your credit cards, or even just changed jobs, you're probably out of luck. Finally, some lenders offer this service only to their current customers.

Remember, Nothing Is Ever Free

Keep in mind, while refinancing can save you money over the long term, the process itself is never free no matter what your broker says. For example, the appeal of so-called no-cost refis is that you don't have to pay up front for the fees typically associated with these loans, such as the application fee, title search, credit check and appraisal, which can easily total more than $1,000.

But there's no such thing as a true no-cost refi. Under these deals, you trade off paying out-of-pocket expenditure for either a higher loan balance or a higher interest rate. Typically you'll pay an additional one-half to five-eighths of a percentage point more for the privilege.

Whether a no-cost refi is the way to go depends on a couple of factors. For starters, if you don't have ready cash to pay the fees and if the rate you can get even with the no-cost premium is significantly lower than what you're paying now (and you're not required to take out a higher loan), then go for it. But assuming you have the money to pay for refinancing, then you need to consider how long you'll be in the house. If you're planning on moving fairly soon, the no-cost refi might well make sense. Consider this: A homeowner with a $250,000 mortgage and $4,000 in closing costs would have to live in her home for about four-and-a-half years to recoup her upfront costs if she chooses a 7.5% rate vs. an 8% no-cost refi. If she couldn't be sure that she would be around for that long, the no-cost refi would indeed be a better way to go.

Finding Your Best Rate

It's infuriating. You open the Sunday paper, you see great mortgage rates, you call and find that those rates are no longer available. The problem? Since there is a lag time of up to three days before rates that are quoted are listed in the papers, those published rates are often lower than the current market. After all, a lender or broker is trying to predict where rates will be in a couple of days so why not lowball it?

The rates you are quoted also vary because some lenders fold fees into their rates, while others do not. And the actual rate that you are quoted based on your personal circumstances will of course depend on your credit history and the size of your loan as well as where you live.

So how do you search for the best rate? The best strategy is probably a combination of online research and old-fashioned calling around. To get a basic handle on rates, a good place to start is at Bankrate.com which lists rates on a national, state and in some cases, local level.

You could also check out some of the online mortgage brokers. They represent just a sliver of the overall mortgage business but may be offering better rates to best the competition. If you go with an online broker, you may be able to do a refi entirely online. And many online brokers and individual lenders will send email alerts when rates fall to a specified point.

But even if you do decide to go with an online lender, be sure to work the phones, too. Call several lenders within a short amount of time ideally within two to three hours to make sure you're making an even comparison. And when asking for a quote, be very specific. Tell the lender or broker what sort of fees you're willing to pay upfront as well as what sort of lockup period you want.

You should expect detailed answers to your questions free of charge, so beware the lender who says you need to pay a fee for information. If that happens, move on.