3 Situations Cash Out Refinancing is a Bad Idea

Taking part in a cash out refinancing can be a great way to tap your equity. If you are using your equity for the right things it can be a smart move. Instead of using other forms of lending with higher interest rates to fund your project, a cash out refinancing is a great alternative. However, there are times when it is not in your best interest. You have to consider your situation individually and determine whether it is in your favor. Here are a few situations that a cash out refinancing is a bad idea.

1. Not Paying off Credit Cards

Credit cards are contributing to a lot of problems for people today. The high interest they charge compounds the problem on a daily basis. The convenience of using a credit card to get whatever you want is too big of a temptation for most people to resist, leading to many people having maxed out credit cards. Having a maxed out card can be terrible for your credit and your financial situation. Just the minimum payment might be too much for you to pay when you have several cards. The fact that your cards are always maxed out will hurt your credit score as well.

It can be useful to get a cash out refinance to pay off the cards and get the situation under control. You can eliminate the high interest and get your monthly payments back down to a normal level. However, many people are in this situation and use the money from a cash out refinance for other things. If you bypass paying off the cards for other things that you don't really need, you are compounding the problem.

2. Vacation Financing

Financing your vacation with home equity money is never a good idea. Your home equity probably took a long time to build up. The amount of principal that you pay each month is very minuscule at the beginning of your loan. Therefore, to use that money on something as frivolous as a vacation isn't advised. You will never get any kind of a return on your vacation. You can't sell it back and it does not appreciate. You can't deduct it on your taxes. There are a lot of things that are not good to buy with home equity money, but a vacation could be one of the worst.

3. Higher Interest Rate

Sometimes, the thought of easy money convinces us to do things that we don't need to do. One of these times is when the prevailing interest rate in the market is higher than what you currently pay. If your mortgage is set up at 5% and you refinance to a 7% mortgage just to get cash out, it is not in your best interest.