The rule of thumb among many financial experts is that you should refinance if you can cut the mortgage rate you’re currently paying by 1 or 2 percentage points or more. But it can be a bit more complicated than that. Still, making the smart choice isn’t difficult.

Can you refinance?

First the bad news: According to the Second Quarter 2013 CoreLogic Equity Report, 7.1 million (14.5 percent of) mortgaged homes are underwater, meaning the amount still owed on the home loan is higher than the value of the property that secures it. This is also known as being in negative equity.

Cheer up! There are two bits of good news. First, it may be possible, if you meet certain eligibility criteria, to refinance even if your loan is underwater by using the federal Home Affordable Refinance Program.

And, secondly, the chances of your underwater mortgage having surfaced recently are high. That CoreLogic report says the value of negative equity across the nation plunged by more than a quarter, just in the three months between April 1 and June 30, 2013. During that same period, 2.5 million American homes went from negative to positive equity.

It would be nice to be able to extrapolate from CoreLogic’s figures, and reckon that all 7.1 million loans currently underwater will, at a rate of 2.5 million a quarter, be in positive equity by spring 2014. Sadly, those are national averages, and some areas will likely take longer to shake off the effects of the housing crash. Still, the number of homeowners shut out from refinancing looks set to dwindle to very few very soon.

Should you refinance?

That aforementioned rule of thumb is a pretty good one, but it doesn’t apply to everyone. The Federal Reserve’s A Consumer’s Guide to Refinancing suggests three circumstances in which borrowers might want to think twice:

1. When you’ve had your mortgage for many years. When you start paying down a home loan, nearly all your monthly payments apply to interest, and only a small part reduces your principal (the amount you borrowed). As the years go by, that very slowly reverses, but, according to the Fed’s guide, it may not be until year 18 of a 30-year mortgage that more of your monthly payment applies to principal than interest. Every time you refinance, you reset your home loan, and begin again to see most of your mortgage costs applied to interest. This doesn’t mean that those who’ve been paying down a home loan for many years definitely shouldn’t refinance, but merely that you should carefully weigh the pros and cons.

1. When you’re planning to move again soon. When you refinance, you have to pay closing costs. If you’re going to move soon, those closing costs can outweigh the savings you’re going to make with a lower rate over a short period. You can see whether refinancing still makes financial sense by dividing those closing costs by the the sum you expect to save on each monthly payment. That should give you your break-even point, expressed in months. Generally speaking, if you’re planning to move before breaking even, don’t refinance. However, your calculations may be affected if you refinance to a cheaper adjustable-rate mortgage (ARM), which may make sense anyway if you’re going to move soon. See what that option does to your math.
2. When your existing mortgage has a hefty prepayment penalty. If your mortgage has a clause that says you have to pay a penalty fee if you repay the loan early, then that’s an added complication. Add the fee to your closing costs to see if refinancing is still going to pay.

When should you refinance?

So you’re sure refinancing is a smart choice for you. When should you do it? Now!

Okay, nobody can predict with any certainty what’s going to happen to mortgage rates, but vanishingly few economists expect them to go down far, except within the normal weekly and monthly fluctuations. The overall trend appears set upward.

Look at 2013. According to the HSH.com Fixed-Rate Mortgage Indicator, average rates for 30-year, fixed-rate mortgages (FRMs) were 2.70 percent in January. By August, they were 4.63 percent. That month, the Mortgage Bankers Association’s economic forecasters expected them to average 4.9 percent through 2014.

If you want the best possible refinancing deal, most financial experts are likely to advise you to get a move on.