Adjustable-rate mortgages are home loans that carry a fixed interest rate for a set period of time -- often five years or less -- and then "adjust" up or down every year afterward based on the performance of Treasury notes or other benchmarks. With rates sinking, a borrower with an adjustable-rate mortgage might be tempted to stick with the same loan when its initial term ends, because it probably will "adjust" to a low rate. But Treasury yields are likely to rise when the economy recovers. As a result, many adjustable-rate borrowers could find themselves with a far more expensive loan in a few years and no opportunity to refinance.

Refinancing isn't a winner for many people with fixed-rate mortgages whom have had their mortgages for a long period of time. If you have paid off a big chunk of your mortgage and you are eating away at the loans principal, refinancing can be counterproductive. That is because the first years of a mortgage are mostly consumed paying interest rather than principal, and if you refinance a bigger percentage of your monthly check will start going to interest again.

When does it make sense to refinance a fixed-rate mortgage? In the old days, the rule of thumb was that borrowers needed to see a drop in mortgage rates of two percentage points before refinancing. That is because the fees lenders charge can offset savings from lower monthly mortgage payments, but increased competition has helped push fees down. The larger the mortgage, the less rates must drop before refinancing makes sense. That is because some refinancing fees are fixed no matter what the size of the loan. And since borrowers with giant mortgages save more money by reducing their interest rate than people with small loans, they don't have to wait as long before the lower monthly payments outweigh the upfront fees.

Homeowners with a loan of more than $150,000 or $200,000 might be able to profitably refinance although rates are only slightly lower. Borrowers with "jumbo" mortgages -- which normally carry higher interest rates than conventional loans -- may have a double incentive to refinance. A jumbo loan is any mortgage whose value is greater than $275,000 and next year that ceiling is being lifted. First off, a refinanced jumbo can yield big savings from lower interest rates. But some jumbo borrowers could get an extra boost by refinancing out of their jumbo and into a conforming loan. A few lenders are now extending their best interest rates to borrowers whose loans exceed $275,000. That means some borrowers that couldn't squeeze into a regular mortgage when they bought their home could now qualify.