Watch Your Debt Ratio During a Cash Out Refinance

Many American homeowners have used refinance agreements tosave money on their interest rates while pulling cash out oftheir homes to pay debt or make major purchases. Mortgagelenders tout the practice as a clever way to save money orachieve a major life event like college tuition or awedding.

If you're considering pulling some cash out of your ownmortgage by refinancing, take a look at the rest of yourpersonal credit. You could inadvertently cause yourself muchgrief while the savings you earned during the refinance getsucked away by other lenders.

All lenders look at your debt to income ratio, along withyour credit score and other factors, to determine the linesof credit they want to extend to you, as well as theinterest rates they expect you to pay. Most banks tie theircredit card interest rates to the prime rate set by theFederal Reserve Bank. Because you pay a number of pointshigher than the prime rate, you might be used to seeing thatinterest rate fluctuate without experiencing any majorsurges.

When you take equity out of your mortgage during a homerefinance, you increase your debt load. Therefore, your debtto income ratio looks less attractive to lenders.

In previous decades, credit card issuers would review yourcredit only once every few years. Usually, they would checkyour credit scores when renewing your card or when yourequested a credit line increase.

Today's sophisticated credit monitoring systems report youractivity on an almost daily basis. When you make a move withany of your creditors, the data create a trail of ripplesthrough the fabric of your current credit relationships.Sometimes, your new debt burden may trigger an automaticsystem that shoots your credit card's interest rate by tenor fifteen percentage points.

Worst of all, you won't know about the increase until itshows up on your statement. Buried in the fine print of yourcontract with your credit card lender are statements thatallow them to change your interest rate at will, with only amaximum of fifteen days' notice. Even if you thought youearned a promotional deal or a fixed rate, your interestcharges could balloon overnight.

Therefore, before considering a cash out refinance, talk torepresentatives at your credit card companies about whetheryour plans could backfire on you. Pay off as much of yourcredit card balances as possible before you cash out so youcan minimize your debt to income ratio. If your credit cardinterest rate increases, use some of that freed-up cash tofree yourself from that card.

Earl Baker is a writer for DebtConsolidationer.com and RefinanceFinds.com.For additional articles and an extensive resource foreverything about Debt-Consolidation and Refinance, please visit us at http://www.DebtConsolidationer.com andhttp://www.RefinanceFinds.com.