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Don't Pay Points or Origination Fees When Refinancing.

Just as you take points and origination charges into consideration when deciding on a purchase loan, you must look even more closely at points or origination charges when you refinance. If 1 point gets you a 1/4 percent interest-rate reduction, the new lower payment rarely pays for the point that you paid.

Using that same $225,000 loan balance and the same current terms, you could find a 30-year rate of 5.25 percent, but you would pay 1 point for it, or $2,250. The new monthly payment would drop only to $1,242, or $35 lower than $1,277.

And you paid the point for that privilege, or $2,250 for $35 per month. Divide those numbers and you arrive at 64.3 months to recover the money you paid in points.

When you're rate shopping and you're being quoted a rate with a point on it, get the rate quote that's just a bit higher. You should expect a 1/4 percent increase in rate when you remove the point from the equation. If you get a loan officer who won't budge on the point or who quotes you something much higher in rate for the i-point trade-off, find another lender.

Don't Pay Any Closing Costs When Refinancing.

Instead, look at increasing your interest rate by enough to cover your closing costs. This is the "no points, no fee" refinance that you see advertised. You in fact do pay the costs; you just do it in the form of a higher rate.

How do you determine what is a fair exchange between a higher rate and no closing costs? First, take your closing cost figure, then divide that amount by your loan amount. Dividing $3,800 by $225,000, you get 0.017, or I-7 points.

If you increase your rate by 1/4 percent for each point, this calculation would get you a 30-year fixed rate of about 5.875 to 6.00 percent. At 6.00 percent, the new monthly payment would be $1,348. That's higher than $1,277 ^ $7.

But you paid no closing costs; the lender paid them for you in exchange for a higher rate. You dropped your monthly payment by $129 per month—for free. There is no cost recovery period. Could you have gotten a lower payment? Sure, but you would have paid $3,800 up front to do so.

 
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