Many people choose to refinance to take advantage of shrinking interest rates or to secure lower monthly mortgage payments. When you refinance, you are taking out a new loan with an entirely new set of rates and terms that will replace your old mortgage. To make sure you're making a smart refinance move, it's important to carefully calculate the costs refinancing against your potential savings.

Here are some things to keep in mind before you contact a lender:

• Before you refinance, find out whether there is a prepayment penalty on your current mortgage. If there is, you may have to pay the amount of the penalty in full before you are able to refinance. It's important to factor this in as you're calculating if refinancing will produce the savings you want.
  
  
• Keep in mind that there will be closing costs associated with refinancing.
  
  
• Refinancing will only work to your advantage if current interest rates are lower than what yours is on your original loan. A general refinancing rule: If you can get rate that's at least 1 - 2% lower than what you currently have on your mortgage, you are likely to benefit from refinancing.
  
  
• If you've been claiming your current mortgage's interest on your taxes, getting a lower rate by refinancing results in less deductible interest.
  
  
• Just like when you originally were shopping for a mortgage, interest rates fluctuate daily.