Be cautious with extra cash.

• Position: Refinancing

With mortgage rates at their lowest in over 30 years and most home values up strongly, many homeowners are refinancing their mortgages and taking out extra cash at the same time. That may be a smart move for some, but use the cash wisely, caution financial planners. First, you need to decide whether refinancing is right for you. For example, homeowners well into the life of their mortgage or who plan to move soon may not find it financially beneficial to refinance. Run the numbers with your planner.

Even if refinancing makes sense, it does not necessarily make financial sense to do so with a mortgage that is larger than the old one in order to take out extra cash--a strategy popularly called cash-out refinancing. Keep in mind that you are adding to your total mortgage debt. If you borrow $25,000 in a cash refinancing, that is $25,000 you have to pay back on top of the underlying mortgage, with interest. Furthermore, you could lose your home if you fail to make payments--no small consideration at a time when the economy and stock market are weak. Interest rates may be at record lows, but home foreclosures are at their highest rate in nearly 50 years.

Moreover, a cash refinancing will cost you more than a straight refinancing--typically, half a percent, more, with another quarter percent added if you borrow over 75% of the value of your home. If you borrow 80% or more, the lender will require you to pay for private mortgage insurance, which can add up to another one percent.

The advantage of cash refinancing is that not only are interest rates low, but the interest on the first $100,000 is Federally tax deductible (for regular income taxes, not the alternative minimum tax) regardless of how you use the cash, and it is deductible above that threshold as long as the money is spent on home improvements or, in some cases, investments. The deduction makes the effective interest rate even lower.

If you still find cash refinancing attractive, ask yourself why you want the cash. Financial planners differ to some extent about how such money should be used, but here are general guidelines from the Financial Planning Association, Denver, Colo.:

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