refinance

HELOC makes sense if refinance doesn't

Don Taylorq_v2.gifDear Dr. Don,
I'm a single grandma working as a teacher's aide making $25,000 a year. My daughter, son-in-law and three wonderful grandkids have all lived with me for the past year and it may be a couple more years before they can get on their feet and get into their own home.

My son-in-law is a contractor and I have many home improvement projects that he will do (without pay, of course) if I get the supplies and material -- replacing all bedroom carpets, living room and kitchen floors, tile for bathrooms, new kitchen countertops, new fence around yard, etc.

Because I don't have the money on hand for all this, I plan to refinance to a lower interest rate and take out $20,000. The interest rate on my existing 30-year fixed-rate mortgage is 5.75 percent. I owe $83,000 and have a credit score of 760. I have no other debt except for a $10,000 line of credit, which I'll pay off when I refinance.

The amount of the loan is $118,000 and the lender's good-faith estimate shows me paying 5.12 percent fixed for 30 years with estimated closing costs of $3,029, and a loan discount of 1.375 percent (dollar amount -- $885) because the loan-to-value ratio is low, with the house appraising at $180,000.

My problem is that I don't have anyone to ask if I'm doing the right thing. I thought about going to an attorney for advice because I'm really worried about becoming a "foreclosure statistic." The closing should be sometime at the end of August. Any suggestions or advice is greatly appreciated.

In six years, I'll be 65 and I plan to sell the house and get into something smaller -- a one-room house so the kids don't move back in! (Just kidding.)
-- Tricia Triage

a_v2.gifDear Tricia,
The decision to do a cash-out refinancing to pay for home repairs and home improvements depends on your income, credit rating, home's appraised value and how long you plan to be in the house.

Sometimes it's easier to break the decision down into two parts. First, does it make sense to refinance? Use Bankrate's "Refinance interest savings calculator" to see if it makes sense. By the way, if you're 10 years into a 30-year fixed-rate mortgage, refinancing with another 30-year fixed-rate mortgage isn't likely to reduce your total interest expense because you've extended the loan out another 10 years. The calculator will show you the total interest savings.

If refinancing does make sense, you can expand the decision to include the cash-out refinancing. If it doesn't, consider a home equity loan or a home equity line of credit to finance the home improvements. A side benefit to the home equity line or loan is that it typically will have much lower closing costs than a new first mortgage.

It sounds like you're doing the right thing by maintaining your home while you have your son-in-law around to complete the work. You won't become a foreclosure statistic if you can afford the new payment in your household budget.

Along those lines, I'm a little concerned about increasing your debt load on a teacher's aide salary. I'm not sure how your school district's budget looks, but it always seems like teacher's aides are the first to get pink slips when the school board is trying to balance a budget.

Read more about refinance.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "Financing a home," "Saving & investing" or "money."

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