Using the Cash-Out Mortgage Refinance as a Bail-Out

By Gabriel Traverso
Mortgage Credit Problems Columnist

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Many American consumers are facing growing debt, and those with equity in their homes often consider a cash-out mortgage refinance as a possible solution. If you have bad credit, you should consider this move even more carefully than a financially-healthy homeowner.

Bad Credit Refinance: Do's and Don'ts

Credit card spending is higher now than ever before. Last year the Center for American Progress reported that the average household's debt has exceeded its income. It's easy to get out of hand with credit cards and if you have equity in your home then a mortgage refinance is an attractive answer. Before you apply for your cash-out mortgage refinance consider the following:
  • If you have at least 40 percent equity in your home then a mortgage refinance could be a good move. But if you have already taken out most of the equity then you should consider other solutions.
  • If rates are lower now than your current mortgage rate or if you have an adjustable-rate mortgage (ARM) that's going to increase your payment dramatically, then it may make sense to refinance -- despite your bad credit.
  • If your bad credit is worse now than when you first took out your home loan a mortgage refinance might not be the best option. However, if you wait until your credit has improved, you may be able to save some real money by refinancing.
  • If your credit-card spending is out of control, change your spending habits before you take out a home loan refinance so that you don't continue to feed the problem.
  • If you think you'll be in your home long enough to recoup the refinancing costs, a mortgage refinance might be the right thing to do.
No matter what road you take to start repairing your credit and get your debt under control, before you refinance your mortgage create and stick to a budget -- and avoid repeating your credit mistakes.

MSNBC: Newsweek Business

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