3 Situations when Cash Out Refinancing is a Bad Idea

Cash out refinancing can be a useful tool to use if done properly. You can consolidate debt, add on to your existing house, and do a number of other things with the money. While it works well in many situations, there are times when it is not in your best interest. Here are a few situations when cash out refinancing is a bad idea.

1. Taking a Vacation

Many of the refinancing companies out there advertise their services frequently. One of the most popular reasons that they give consumers to refinance is to take the "vacation of their dreams". While it might sound fun, this is one of the worst financial mistakes you can make.

You can save much faster for a vacation just by saving $50 or $100 per month for a while. When you start paying a mortgage, you are usually only paying a few dollars per month down on the balance. Therefore, you are saving very slowly. Spending that hard-earned equity on a frivolous thing like a vacation is not good money management. Save your equity for something more important.

2. Buying Consumer Goods

Another common mistake that many people make with cash out refinancing is spending it all on consumer goods. They go out and buy a big screen TV, a gaming system, and several games or DVD's with their money. While it might be fun, this is not the best use of your equity money either. Consumer goods do not gain any value and you can not get that money back. You can't even deduct the purchases off of your taxes like you can with other types of home improvements.

3. Over-Improving Your House

There are times when improving your house is not always in your best interest. If you try to overdo it you will not be getting a good return on your investment.. You can usually only sell your house for whatever your neighbors are selling theirs for. Therefore, you should not get more cash out of your house if you're already up to the standards of the neighborhood.