Words of Caution for the Cash-Out Crowd

If you're looking for the next bubble, consider refinancing.

Homeowners wisely have refinanced their mortgages -- often several times -- to chase down the lowest rates and hack away at their monthly mortgage payments.

This all seems perfectly prudent. However, in the rush to refinance, they have taken hundreds of millions of dollars in equity out of their homes in the past two years form of cash-out deals.

"It scares me," says David Wyss, chief economist at Standard & Poor's. "People are borrowing too much money from their homes."

It also scares Fannie Mae: The government-sponsored mortgage-financing giant just tightened standards on cash-out loans, hoping to slow the money drain out of American homes. The new standards don't take effect until February, and they aren't especially stringent. This means homeowners will probably have to rely on their own discipline and not overextend themselves.

Cashing Out Cash-out refinancing levels have soared in the past two years

Source: Economy.com

"To tap these once-in-a-lifetime low rates and use them nonproductively is missing a great opportunity," says Brad Elman of Million Dollar Round Table, an association of financial-services professionals. "A lot of people are treating cash-outs as if they are found money."

As homeowners rush to take advantage of what could be their last chance to refinance at rock-bottom rates, they need to keep an eye on making things easier for themselves down the road. If you're thinking about cashing out, you may want to ask yourself these questions first.

Are You Using It Right? Taking equity out of your home for certain investments can be a great move -- education, home improvement and other expenditures that offer a long-term benefit. But taking money out to fund a vacation or buy a depreciating asset such as a car is probably a bad idea. Plus, you are now accruing interest that you will pay for long after the life of a car, for example.