Words of Caution for the Cash-Out Crowd

Are You Paying Off Credit Card Debt? Financial advisers say this is generally a good idea, because credit cards almost always carry higher financing rates. Steve Schwartz, an adviser at Old Oaks Mortgage in Barrington, Ill., says if your debt stems from a one-time issue, such as medical or divorce bills, cashing out makes sense, especially if you apply any additional cash amount back to paying down the principal on your mortgage. For those homeowners who have run up credit card debt by living beyond their means, it's time to reassess your spending habits. "If someone carries debt, even if they pay it off, they're likely to carry it again," says monstermoving.com's mortgage advisor Al Bowman.

Are You Getting the Best Deal on a Cash-Out Refinancing? If you're doing a cash-out refinancing at a 75% or lower loan to value, there are typically no pricing adjustments. Some lenders will let you go as high as a 100% cash out, but you will pay for it with a higher rate. It may be better to stay at 75% loan to value and "piggy-back" with a home-equity line or a fixed-rate second mortgage, Schwartz says. If there is a higher rate on the second mortgage, it's at a much lower loan amount.

Have You Taken Cash Out Before? If you executed a cash-out refinancing in the past year for home improvements, save your records and receipts. There are restrictions on multiple cash-out refinancings within a 12-month time frame, but some lenders don't consider cash used for home improvement as cash-out funds. This means it won't affect loan to value calculations going forward. For instance, if you were at an 80% loan to value, and 5% of those funds from a cash-out refinancing can be documented, a subsequent 80% refinancing won't incur any pricing adjustments.

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