Is it time to refinance your ARM?
If you have an adjustable rate mortgage, you may benefit from refinancing. Here’s what to consider.

There are many ways you can benefit in both the short and long term from refinancing an adjustable rate mortgage (ARM). You may be able to get:

• A lower margin. If your credit score has improved since you took out your mortgage, you may be able to refinance to an ARM with a lower margin and save. This is because the size of the margin (the amount that’s added onto a specific index to calculate the interest rate you’re charged) is partly based on the credit score you have at the time you apply for a mortgage. A better credit score can mean a lower margin and lower interest payments.
• More stable payments. One of the downsides of an ARM is that there is always the potential risk of a rise in your monthly payments. In a rising rate environment, you may want to consider refinancing to a fixed-rate mortgage to protect yourself from future rate increases. Alternatively, it may be possible to protect yourself by refinancing to another ARM with more favorable caps — limits on how much your payments can rise.
• Faster ownership of your home. Refinancing to a shorter term, say from a 30-year term to a 15-year term, will allow you to pay off your mortgage much faster and save you thousands of dollars in interest payments.
• Access to your home equity. If you have a good portion of your home already paid off, you might consider refinancing to a new mortgage with a higher principal. You’ll receive the extra amount in cash, which you can use to consolidate debt or make a major purchase.

So how do you know when it’s the right time to refinance your ARM? Consider the following factors:

• The new rate. As a rule of thumb, it’s worth considering a refinance if your new interest rate will be around 1.5 to 2 percent lower than your current rate. (Otherwise, fees may eat up any potential savings.) Compare your current rate with the posted rates offered by other lenders, but be sure to ask about the index and margin — if they are different from those of your existing ARM, you may be comparing apples and oranges. The loan’s annual percentage rate (APR) can be a helpful yardstick. Unlike the interest rate alone, it includes other charges or fees to reflect the total cost of the loan.
• Closing costs. When you refinance — just like when you took out your original mortgage — you’ll face fees that can add up and cancel out some of what you’ll save by obtaining a lower rate. Use the LendingTree refinance calculator to help you determine how long it will take for you to break even on the charges.
• Interest rate trends. ARMs offer an advantage at times of falling interest rates. But if you fear interest rates may rise, you might want to consider refinancing your ARM for a mortgage with a fixed rate and consistent monthly payments. A fixed-rate mortgage will carry a higher rate initially, but locking in when rates are low can save you in the long term.
• How long you’ll stay in your home. If you plan to move in a year or two, refinancing will generally not pay for itself. Let’s assume that your new mortgage will save you $150 a month and that the cost of acquiring it is $4,500. Your break-even point is 30 months ($4,500 ÷ $150), so you’ll want to stay in your home at least that long to make refinancing pay off.

When is your mortgage payment late?
It’s important to make your mortgage payments on time. But if you’re late on a payment, you need to know what certain terms really mean.

Most homeowners know a late payment on a home loan can result in a negative item on your credit report. But when exactly is your payment deemed to be “late”?

Mortgage payments typically are due on the first day of each month, which means a payment received by the lender on the second day of the month is considered late, technically speaking.

However, most lenders offer a grace period during which borrowers can make up late payments. Grace periods are usually 15 days. That means a payment that’s received by the lender on or after the second day of the month, but still on or before the 15th day of the month, technically would be late, but could be within a grace period.

Penalties usually kick in after 15 days
Most lenders won’t assess a late fee or report a late payment to the credit bureaus until the grace period ends. That means you may be able to make technically late payments during this period without suffering the adverse consequences of a late fee or a mark on your credit report.

Once the grace period expires, though, you’ll probably receive a 15-day late notice from your lender and be assessed a late-payment penalty. If you receive such a notice, act quickly because if the lender doesn’t receive your payment within another week or so, you’ll probably get more letters and telephone calls.

30 days late: What happens and what it means
Grace period or not, payments that are 30 days late or aren’t received on or before the last business day of the month likely will be reported as “late” to the credit bureaus.
That can be tricky if the month ends on a weekend or happens to be February, the only month that has fewer than 30 days. If February 27 and 28 were a Saturday and Sunday, a payment that wasn’t received on or before February 26 could be reported as late. A “leap” year, in which February has 29 days, would add an extra day.

If, on the other hand, a month has 31 days and the last day of the month is a business day, a payment received on that day probably wouldn’t be reported as late, even though the 31st day would be one day more than the 30-day period.

Proof of receipt is recommended
Unless you send your payment by certified mail or overnight delivery to an address where a live person signs for the receipt, you may have no record of when your payment was received. Most lenders and loan servicing companies offer a pay-by-phone or automatic payment option, either of which is a good way to ensure your payment is received on time.

If you don’t know when your payments are due, whether there is a grace period, when the lender reports late payments to the credit bureaus or what methods you can use to make your payments, read your loan documents or call your lender or loan servicing company. Ask specific questions to find out what rules apply to your individual situation.

Finally, keep in mind that closed-end loans (e.g., a 30-year mortgage) differ in some respects from open-ended loans (e.g., a home equity line). If you make a payment later on an open-ended loan, you could owe more interest and a smaller amount of your payment might be applied to interest expense because the interest is calculated on the number of days between your payments.

Are you better off not paying down your mortgage?
Conventional wisdom says that you should pay off your mortgage as fast as you can. But in some cases, your money is better spent elsewhere.

Each year, about one in six Americans makes extra payments on their mortgage in an effort to own their home sooner. But is paying off your mortgage always a good idea?

How can paying off debt be a mistake? That’s a fair question, especially when you look at how much interest you can save through prepayments. Say you have a $200,000 mortgage at a 6 percent interest rate for 30 years and you make an extra payment of $2,000 annually. You would pay your loan off seven years faster and save more than $68,400 in interest. Those are pretty impressive numbers!

However, consider the following:

1. Mortgage interest
If you deduct mortgage interest on your tax return, your savings from paying down your mortgage might actually be considerably less. If you are taxed at 20 percent, you’re effectively paying just 4.8 percent interest on that 6 percent interest rate mortgage. Your total interest savings from paying off your mortgage early in the above example, would therefore be less than $50,000.

2. Retirement savings
You may be able to save more in the long run if you direct that extra money into a tax-deferred retirement savings plan. More than a third of American households currently do not take advantage of retirement plans sponsored by their employers, in some cases because they’re putting too much into their mortgages. If your employer matches 50 percent of your contribution, as many do, not taking full advantage of such a plan is giving up a lot of free money. For example, say you earn $35,000 and are taxed at 20 percent:

If you put $175 per month into your 401(k) account
(Instead of making an annual $2,000 mortgage prepayment)

You’d save $35 a month in tax
Plus, earn an extra $87.50 a month (if your employer adds 50 percent)

If your investments grow at 6 percent annually, in 22 years and three months (the time it would take to pay off your accelerated mortgage):
Your plan would be worth about $145,000.

3. Other debt
Even if you don’t have a 401(k) that’s topped up by your employer, or if you do have one and are already taking full advantage of it, you may still be able to save more by redirecting those extra mortgage payments. Remember, your mortgage is likely the lowest-interest-rate loan you have. If you’re carrying a balance on your credit card, you could easily be paying rates that are triple that of your home loan. Putting that extra cash toward your plastic debt will save you more than paying off your mortgage.

4. Insurance coverage
You may also be better off using that extra money to buy better health insurance or disability coverage, since medical bills and loss of income due to accident or illness are a factor in most personal bankruptcies and mortgage defaults. If you have children, saving for their education with a 529 college savings plan is also worth considering.

5. Peace of mind
If prepaying your mortgage is often not the best financial decision, why do so many Americans do it? Probably because there’s something deeply satisfying about owning a home free and clear. And that’s a benefit that can’t be ignored. If you’d be happier, and believe your life would be less stressful if you paid down your mortgage, then it could be the right choice for you. Achieving peace of mind can be worth the extra couple of hundred dollars a year you may be able to save by redirecting those mortgage prepayments.

Just make sure you understand the difference between bad debt and good debt. The former, such as credit card debt carries a high interest rate and does nothing to help build up your net worth. Good debt, on the other hand, carries a reasonable rate and is used to purchase something that is likely to go up in value, such as your home. In most cases, your mortgage is good debt, and you may just end up further ahead if you’re not in such a hurry to pay it off.

Check with your accountant or financial advisor to see which course of action makes the most sense for your particular situation.

Should you refinance your mortgage?
Use our list of questions to see if you can benefit from mortgage refinancing.

The average U.S. homeowner refinances his or her mortgage every four years. Sometimes it’s to take advantage of lower interest rates, but there are many other reasons to refinance. Are any of them right for you? Find out by seeing if you can answer “yes” to one or more of the following questions.

Are interest rates rising?
If you have an adjustable-rate mortgage (ARM) and expect interest rates to rise, you may want to switch to a fixed-rate loan. By locking in the interest rate, you won’t have to worry about your payments climbing in the future. On the other hand, if rates are rising and you have a fixed-rate mortgage, you’re in good shape. You may still have other reasons to refinance, but obtaining a lower rate isn’t one of them.

Is your monthly payment straining your budget?
You may want to consider refinancing to lower your monthly payment.
Even if rates are the same as when you obtained your current mortgage, you may want to refinance to extend the term of your loan if you’re having difficulty meeting your monthly payments. For example, assume you have a $200,000 mortgage at 6 percent for 30 years and have been paying $1,200 a month for seven years. Refinancing to a new 30-year loan at the same rate would lower your monthly payment to $1,075.

Is your ARM causing stress?
Perhaps you were attracted to an adjustable-rate mortgage because the initial rate and payments were lower than a fixed-rate loan. However, many ARMs are adjusted annually. That means if interest rates go up so too will your monthly payments. If you aren’t comfortable with this variance and would prefer the peace of mind of a consistent payment, consider refinancing to a fixed-rate loan or to another ARM with more favorable rate caps (limits on how much the interest rate can increase).

Has your credit rating improved?
When you applied for your mortgage, perhaps you had little credit history or maybe even a blemish or two on your borrowing record. Your credit score was a big factor when your lender determined the interest rate on your mortgage. If you had a low or mediocre score that has since improved, you may now be eligible for a better rate if you refinance.

Have you recently begun to earn a higher income?
Refinancing isn’t always about lowering your monthly payment. Maybe you’ve received a salary increase at work, or your spouse has recently returned to the workforce after staying home to raise a family. You may want to put that extra income towards your mortgage. Converting to a 15- instead of a 30-year amortization, for example, will pay it off much faster and save you tens of thousands of dollars in interest payments.

Has your home equity climbed above 20 percent?
If you obtained your mortgage with a down payment of less than 20 percent, chances are you incurred Private Mortgage Insurance. However, if rising house prices have increased the value of your house, your home equity may now exceed 20 percent. If this is the case, you have several options. First, you can ask your lender to cancel your PMI. To do this, you’ll need to get an appraisal to prove that your home’s value has increased and that you have exceeded 20 percent equity. However, if you can’t persuade your lender to drop the mortgage insurance, you might want to consider the refinancing. If your new mortgage is for at least 80 percent of your home’s appraised value, you’ll avoid paying PMI and could save $100 a month or more.

Do you need to consolidate debt?
If you have built up considerable equity in your home, but you’re mired in other debt, consider cash-out refinancing. That involves getting a new mortgage for a larger amount than you currently owe. For example, if your home is worth $285,000 and your outstanding principal is currently at $185,000, you have $100,000 in equity. By refinancing to a new mortgage with a principal of $215,000, you can free up $30,000 to pay down high-interest credit card or other debt. You’ll save money if your new mortgage has a lower rate than the other loans, and you’ll have the added convenience of only having to make a single monthly payment.

Do you need money for a major expense?
Cash-out refinancing isn’t just for consolidating debt. In recent years, rising house prices may have resulted in your building thousands of dollars worth of equity in your home. Tapping into this equity could enable you to undertake some major home improvements, or to free up money for your children’s education.

Remember, refinancing doesn’t come without a price: closing costs will eat into your savings at first, so the longer you plan to stay in your home, the more you’ll benefit. Before considering refinancing, use the LendingTree refinance calculator to help determine your break-even point.