I am Peter Thompson, My goal is to take the mystery out of the home buying and mortgage process, and help home buyers understand their options.

Cash out and debt consolidation refinances ?

If you have owned your home for a while, chances are that it is worth much more than what you originally paid. This means you have built up equity, and if you are like most people, the equity in your home may be your biggest asset, or source of wealth. If it makes sense, you can tap into this equity through what is called a cash-out refinance.

Whether this makes sense or not depends on your financial situation, and what you are planning on doing with the money. By taking out some of your equity in cash, you are increasing your mortgage and your monthly payment. This can make sense if you are using the cash to better your financial situation or improving you r property, but if you are using it to take a vacation, buy more stuff which won’t go up in value, or other short term uses, you may regret your decision.

Let’s look at some ways that refinancing can make sense. What is your over-all debt level? Are you feeling pressure making all the payment on your credit cards and other consumer debt? If this is your case, the equity in your home may be a tool to restructure your debt and give you a fresh start. For example, I recently helped out a homeowner who had lost his job and, without much in savings, lived off his credit cards for nearly six months. He ended up getting a new job in his field, but now he was saddled with a ton of debt. He did however, have a home he had bought years earlier with a good deal of equity built up. We refinanced the home, combining all his debts with the old mortgage into one new larger mortgage. By lowering the interest rates and extending the new loan over 30 years, the new mortgage reduced his total payments by more than $500 per month. In this case it was just what he needed for a fresh start.

There is a danger in this strategy. First, you are paying the loan over a long period of time, so you are paying interest on the interest. But the bigger problem is that it is too easy to get back in the same trouble if you don’t change your credit habits. I’ve seen too many people who used a cash-out refinance to consolidate their debts and get a new start, only to run up their credit cards and get right back in debt. For a long term solution you need to be able to change your outlook and credit habits.

Other good uses of you equity can be to put on an addition which will increase your enjoyment and the value of your home, or maybe you have a business opportunity where the equity can be put to better use.

Any time you take out a loan against the equity in your home, you are trading some security for the cash you need, but in the ri

ght situation it can be a great way to go.