Be Careful When Pulling Cash Out of Your Home
In these days of record low interest rates on mortgages, more and more homeowners are using refinancing offers to get a lower interest rate, while at the same time pulling cash out of their home to pay off debt, pay college costs or make major purchases. Many banks and mortgage lenders have encouraged this practice as a great way to save money while paying for the purchase of big ticket items.
It is important, however, for those considering such a move to take a good look at the rest of their financial life and personal credit. Many homeowners have inadvertently caused themselves lots of trouble by taking too much equity out of their home in a refinance deal.
That is because all lenders will look at the borrower’s debt to income ratio, in addition to the credit score and credit history, to determine how much of a credit line to extend, as well as to determine the interest rate the homeowner will be required to pay. Taking equity out of a mortgage during a home refinance will increase your level of debt, making the debt to income ratio less attractive to potential lenders.
This change in debt to income ratio can affect a consumer a great deal. While in past decades, issuers of credit cards would review a consumer’s credit once every couple of years, usually before issuing a new card, or when the consumer asked for a credit line increase.
These days, credit card issuers continually monitor activity on a consumer’s credit file, meaning that any move made with one creditor, like taking money out of a mortgage through a refinance, can have an impact, either positive or negative, on all other credit accounts. The assumption of new debt, whether through a mortgage refinance deal or major new purchase, can trigger an automatic increase in the interest rate of most or even all of your credit cards. If you carry a balance on those cards, you could end up paying a lot more in interest charges.
Perhaps the worst part is you have no way of knowing that this increase has taken place until you receive your bill. In the fine print of the credit card agreement, it states that the card issuer is able to raise the interest rate at will. It is important therefore, to thoroughly research any change that would impact your debt to income ratio. This ratio can be just as important number as your credit score, and it is important to treat it with the care it deserves.