Your Complete Guide to Refinancing

Mortgage rates are nearing historic lows and that means millions of us are going to refinance.

Here is an online calculator that can help you figure out if you will save money by refinancing. Keep in mind, this calculator is only as good as the numbers you plug into it. So take the time to get out your mortgage statement or call your lender so you have the right data.

When you're trying to figure out whether to refinance, here's the big question: How long will it take for your new monthly payment to yield enough savings to make up for the closing costs for the new loan?

By keeping your closing costs down, you can make refinancing even more attractive. Closing costs are one of my favorite topics because there are few areas in life where you can save thousands of dollars and this is one of them.

Click Here to Ask Elisabeth Your Consumer Questions About This Topic or Any Other Consumer Issue

American homebuyers routinely pay abusive closing costs. There are two kinds: real fees that are inflated and junk fees that are just plain made up. It doesn't have to be that way. If you know what you're doing, you can save thousands of dollars at the settlement table. Closing costs on refinances should be even lower, because the lender and title company have less work to do.

Here's the problem: When you apply for a loan, the mortgage company gives you a list of the fees you can expect. It's called a Good Faith Estimate. What a joke. All too often these estimates aren't given "in good faith" at all. When I closed on my first place, the fees were a whopping $2,000 more than I had expected. Of course, I questioned every single line item, found several junk fees and got the company to knock several hundred dollars off my closing costs.

Here's a breakdown of the typical fees you will see on your "settlement statement." I explain what the fees are actually for and how much they typically cost in the Washington, D.C. area, where I live. Keep in mind these are rough estimates. Lots of factors can make these fees higher or lower (like where you live, whether you're a first-time homebuyer, and if you have poor credit.) Understanding what the fees are for will help you bargain them down.

Fees Imposed by the Lender

Loan Origination Fee

This fee -- 1 percent of the purchase prices -- is simply a way for the lender to make a bit of money up front. If you deal directly with a mortgage company, rather than with a mortgage broker, this is how the loan officer makes his money. The loan origination fee is another name for a "point" and it is tax deductible.

Loan Discount

The "loan discount" refers to the "points" you pay to buy down your interest rate. If you choose to pay points, each point will be 1 percent of the loan amount. Take out a loan for $100,000 and one point will equal $1,000. As a general rule of thumb, for each point you pay, you buy down the interest rate by a quarter of a percentage point. So, for example, you could pay zero points and get a 7.75 percent interest rate. Or you could pay 3 points and get a 7 percent interest rate.

If you don't plan to keep the home long, points can be expensive. If you plan to stay put a long time, points begin to pay for themselves. If you are purchasing a house, points are tax deductible the year you take out the loan. If you are refinancing your house, you have to deduct the points over the life of the loan. With interest rates so low right now, it's probably not necessary to pay points.

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