According to a recent study, more home owners are using the equity in their homes to raise cash than at any time in the last 15 years. The majority of home owners refinancing their homes took out loans for more than their original balances.

Is this a problem? It depends on what happens to the economy, because if economic conditions get worse, personal bankruptcy can be the result of excessive levels of debt.

If interest rates are falling, and if house prices are increasing, and your job is secured, borrowing against the value of your house might not be a problem.

For example, a $150,000 mortgage at 6% interest, amortized over 25 years would cost you about $960 per month. If interest rates fall to 4% interest, that same mortgage would cost less than $800 per month. As a result, if interest rates are falling, and I can afford to pay $960 per month, I could increase my mortgage to $180,000 and my payments would still be less than $960 per month!

That’s the temptation: if interest rates are falling, in the above example I can put $30,000 cash in my pocket, and my monthly payments don’t increase.

However, if interest rates are rising, refinancing can cause a serious problem. You can see it by reversing the example above. If my mortgage interest rate went from 4% to 6%, my monthly payments increase from less than $800 per month to about $960 per month. Now I will have $160 less per month to live on.

If you have other debts to service, you could get into financial trouble, which can lead to personal bankruptcy.

Normally as interest rates go down, house prices increase, because they are now more affordable. The opposite is also true. As interest rates increase, house prices decrease as they become less affordable. That can cause two problems:

First, your monthly mortgage payments are higher. Second, your house is worth less money, so even if you sell your house you may find you get less than expected on the sale.

The message is clear: if you plan to refinance, be sure you can afford the increased payments, even if interest rates increase, or you could find yourself facing Chapter 7 bankruptcy.

For most home owners, refinancing occurs because they have other high interest debts like credit cards that they want to service. Before refinancing, be sure that you have your expenses under control. Refinancing only helps if you can stay out of debt in the future.

Author Information: Bankruptcy America

More References

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Lorenzo Mortgage Company, Inc. - Lorenzo Mortgage Company Inc. - NY State Mortgage Broker specializing in purchases, refinancing, debt consolidation, home equity loans, reverse mortgages and commercial loans.

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