Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

Bloomberg Customers

Businessweek Archives

Be Careful About Cash-Out Refis

? All house, no furniture |


| Too Many Contingencies ?

July 06, 2005

Be Careful About Cash-Out Refis

Peter Coy

Taking out some cash when you refinance a fixed-rate mortgage seems like the closest thing there is to picking up free money.

But there's a big, hidden cost in the future, according to a nicely done new article in a publication you probably don't see every day, The Regional Economist, published by the Federal Reserve Bank of St. Louis.

The piece by senior economist William Emmons comes to this conclusion:

Unless a household really needs the extra cash today, cash-out refinancing may not be the best choice. Even though the monthly payment may remain the same, the increased mortgage principal amount represents a greater debt burden that must be repaid in the future.

You need to read the whole article to understand it, but the key idea is that falling interest rates (which borrowers like) are almost always accompanied by falling inflation (which borrowers don't like). Inflation is the debtor's friend. It makes the real cost of fixed mortgage payments shrink over time. So when inflation is lower, the real cost of the payments shrinks more slowly. That's bad for you.

So let's say interest rates--and inflation--fall. If you react by taking out a bigger loan and extracting cash, you're condemning yourself to carrying a high real debt burden for years to come. Higher than if you simply borrowed the same amount. And much higher than in the old world of higher interest rates and higher inflation.

There ain't no such thing as a free lunch.

05:15 PM

Mortgage Rates

TrackBack URL for this entry:

blog comments powered by Disqus