Q: In the era of rather widely and rapidly fluctuating mortgage interest rates, when is it economical to refinance a mortgage? For those of us with mortgages obtained during high interest rate periods, the decline in rates over the last several months causes a certain psychic pain.

What options for refinancing are available for the consumer? Is there any way to avoid paying all of the "front end" costs involved in obtaining the original mortgage? What costs should a consumer expect to pay in refinancing? Should a second mortgage be considered?

In my case, I bought a condominium in the District last summer and obtained a 15-year mortgage at 13.5 percent. The loan amount represented about 70 percent of the price.

Please advise. A: One myth about refinancing should be dispelled immediately before I respond substantively to your question.

Many people think that refinancing is merely the substitution of a new loan for an old.

What they often do not recognize is that in a refinance situation, the person obtaining the new mortgage must pay almost all of the closing and settlement costs as if he were buying another piece of property.

There are points to be paid to the lender, and since there is no seller involved, there is no one around with whom you can split these costs.

The new mortgage lender will require a new title search and mortgage title insurance, and you will also have to pay settlement fees, survey fees (although not for a condominium) and some recordation fees as well.

In some jurisdictions, for example the District of Columbia, you do not have to pay a recordation or transfer tax when you are placing a new first-mortgage on the property, unless it is a construction loan.

In Maryland, on the other hand, there is a tax which the authorities will collect in order to permit you to put your new loan on the books.

But, even though you do have these many costs, it is possible to borrow enough money so that those costs are paid out of the proceeds of the new loan, rather than out of your pocket directly.

It is often easier to amortize these front-end costs over the life of the loan -- say 30 years -- than have to pay them up front with your own money.

There is no easy answer to the question of whether and when one should refinance.

There are many factors to consider, over and above the simple question of whether the new rate of interest is lower than your current rate.

First, you have to consider the upfront cost of the refinancing. Second, you have to consider whether you are giving up, for example, an assumable mortgage for a nonassumable mortgage. Third, you have to give serious consideration as to whether your new mortgage should be based on an adjustable rate concept or for a long-term fixed rate.

As we all know, the long-term rates are more expensive than the short-term adjustable rate mortgages (ARM).

Let's look at your particular example.

Although you did not indicate what your purchase price was, let us assume that it was $100,000, and that you borrowed $70,000 at 13.5% for 15 years. I seriously doubt that your property has depreciated very much in value from when you bought it last summer. Here are some figures for your consideration.

Loan Rate Payment

$70,000 13.5% $908.83

$80,000 10.0% $702.06

$80,000 12.5% $853.81

As this chart dramatically illustrates, your current monthly payment of principal and interest is $908.83. If you were to obtain an ARM at rate currently just below 10 percent, and if you were to borrow $80,000, the new monthly payment -- at least for the first year -- would be $702.06.

If you decided that you did not want the risk of an ARM but would prefer a fixed 30-year loan, since they currently are running around 12.5 percent, the monthly payment would be approximately $853.81.

As I calculate your situation, by the time you end up paying approximately $3,500 for points and closing costs, if you borrowed $80,000, you would end up with approximately $6,500 in your pocket -- and this is totally tax-free money.

The new $80,000 loan would be used to pay off the old $70,000 See KASS, F4, Col. 1 mortgage, and after you pay approximately $3,500 in closing costs, you would end with the $6,500.

And, your monthly mortgage payment would be considerably lower for an ARM, and somewhat lower for a fixed 30-year mortgage.

But there is another advantage to be gained by refinancing: namely you would get additional tax breaks. You indicated that your current mortgage is amortized on a 15-year basis.

This means that you are paying more in principal than you would be if you had a 30-year loan. Thus, a greater percentage of the new loan would be for interest payments -- thereby tax deductible -- than your current situation.

There are those who feel that it is important to pay off the loan quickly, sacrificing the interest deductions for the opportunity to pay a considerably lesser amount of money overall for the loan. This debate will continue for years to come. Only you can personally decide what your long-term objectives are.

If you plan to stay in the condominium for the next 15 years, and you are not in a terribly high tax bracket, then perhaps you are better off hanging on to your current loan.

But if you are like most Americans, who turn over their house, condominium or cooperative unit every five to seven years, then maybe refinancing is in your best interest.

The bottom line in making the decision is to "do the numbers."