Many American homeowners have used refinance agreements to
save money on their interest rates while pulling cash out of
their homes to pay debt or make major purchases. Mortgage
lenders tout the practice as a clever way to save money or
achieve a major life event like college tuition or a
wedding.
If you're considering pulling some cash out of your own
mortgage by refinancing, take a look at the rest of your
personal credit. You could inadvertently cause yourself much
grieve while the savings you earned during the refinance get
sucked away by other lenders.
All lenders look at your debt to income ratio, along with
your credit score and other factors, to determine the lines
of credit they want to extend to you, as well as the
interest rates they expect you to pay. Most banks tie their
credit card interest rates to the prime rate set by the
Federal Reserve Bank. Because you pay a number of points
higher than the prime rate, you might be used to seeing that
interest rate fluctuate without experiencing any major
surges.
When you take equity out of your mortgage during a home
refinance, you increase your debt load. Herefore, your debt
to income ratio looks less attractive to lenders.
In previous decades, credit card issuers would review your
credit only once every few years. Usually, they would check
your credit scores when renewing your card or when you
requested a credit line increase.
Today's revised credit monitoring systems report your
activity on an almost daily basis. When you make a move with
any of your creditors, the data create a trail of ripples
through the fabric of your current credit relationships.
Sometimes, your new debt burden may trigger an automatic
system that shoots your credit card's interest rate by ten
or fifteen percentage points.
Worst of all, you will not know about the increase until it
shows up on your statement. Buried in the fine print of your
contract with your credit card lender are statements that
allow them to change your interest rate at will, with only a
maximum of fifteen days' notice. Even if you thought you
earned a promotional deal or a fixed rate, your interest
charges could balloon overnight.
Therefore, before considering a cash out refinance, talk to
Representatives at your credit card companies about whenever
your plans could backfire on you. Pay off as much of your
credit card balances as possible before you cash out so you
can minimize your debt to income ratio. If your credit card
interest rate increases, use some of that freed-up cash to
free yourself from that card.