The pros and cons of cashing out your home equity

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In the past few years, millions of Americans have refinanced their mortgages and cashed out the equity in their homes, but is refinance right for you?

If you are thinking about refinance, first consider the implications on your monthly payment. In all but the rarest of circumstances, you probably should not refinance unless doing so lowers your interest rate.  If you are able to manage a higher monthly payment, make sure you have a plan for your cashed-out equity that justifies the greater expense. 

Property values have been skyrocketing for the past several years, but there now are indications of a cooling housing market. Has the equity in your home been built up through rapid appreciation, or has it come through diligently paying down your mortgage?  The latter case is much less risky.

The biggest potential risks involved with cashing out your equity are higher costs of maintaining your loan, a weakening housing market, and depreciating value of your home. You definitely do not want a $350,000 mortgage on a home that is worth $275,000.

If you want to refinance, have a plan for your cashed-out equity. Paying off higher interest debt is one good idea, as is investing the money in property that promises a higher return than your refinanced interest rate.  As long as you are aware of the risks involved, your cashed-out home equity can be used in any manner you would like, and definitely can work in your favor.