You’ve probably heard that it can be a smart move to refinance your mortgage, but may be unclear about what that means and whether it applies to you or not. It can be tricky to figure out when refinancing is a good option for your mortgage. The primary consideration is whether or not refinancing will benefit your overall financial picture. If you are thinking about refinancing, here are some ideas that can help you decide.

Getting a Better Interest Rate

This is the main reason people chose to refinance their mortgages. If you can get a better interest rate, it could save you thousands of dollars on the cost of your home, depending on how much you owe and what the drop in interest rates is. The general advice is to wait until you can get an interest rate at least two points lower than your current rate. Of course, more is better. The lower the interest rate, the less interest you will ultimately pay. However, if your plans are to stay in the home long-term, it may be worth refinancing even for a smaller reduction in interest rates.

Long-Term Housing Plans

The length of time you plan to own the home is also a factor in whether or not you should undertake a mortgage refinance at all. There is a cost for refinancing, over and above simply paying off the rest of your mortgage. It will take several months of lower monthly mortgage payments to make up for this expense. If you are not planning to stay in the house long enough to recoup the cost of the refinancing, it is not worth it. You’ll actually lose money by refinancing in that case.

Credit Score Change

This is related to available interest rates for your loan. Your credit score directly influences what kind of terms you are able to borrow money at. A good credit score demonstrates to lenders that you are less of a risk, and they will subsequently offer you lower interest rates. If you have owned your home for several years, there’s a good chance that your credit score has improved over time, especially if you have been diligent about paying bills in a timely manner. It may be worth getting a copy of your current credit score to see if there have been changes in your favor.

Changing Loan Type or Insurance

If you used an adjustable-rate mortgage to get a lower initial interest rate, that rate may be on the way up significantly in the future. Before the adjustment happens, you may be able to change to a fixed-rate mortgage with a lower rate than your original ARM mortgage will adjust to. Again, this is especially true if your credit score has improved over time. Also, if your original mortgage required private mortgage insurance, refinancing may enable you to remove it. When the balance of the mortgage loan is less than 80 percent of the home’s total value, private mortgage insurance is generally not needed. If you have paid off enough of your loan, you may be able to refinance to a new mortgage and get rid of this extra expense.