Watch Your Debt Ratio During a Cash Out Refinance

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


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

grief 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


When you take equity out of your mortgage during a home

refinance, you increase your debt load. Therefore, 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 sophisticated 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 won’t 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 whether

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.

Source by Earl Baker

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