Dear Dr. Don,

We refinanced our home about 15 months ago at 4.75 percent. Since then, we have taken out a home equity line of credit to add an addition to our home. It is currently at 6.5 percent but is variable and could go as high as 14 percent.

Our addition is almost complete, and we are considering refinancing the whole thing — HELOC included — since rates are still very low. Our HELOC has a 10-year draw and 20-year payback period. Is this the best thing to do? Do we need a mortgage that allows cash out in order to pay off the HELOC?

We are hoping after the addition we will still have at least 20 percent equity based on what we paid per square foot (plus the average price per square foot in our area) to add the addition.

— Brandi Bundle

Dear Brandi,

While I’m not thrilled with homeowners doing serial refinancing, especially when your existing first mortgage is at a near-great rate, I can understand why you’re considering a cash-out refinancing to take out the HELOC and reduce your interest rate risk.

Cash-out refinancings have become more difficult to qualify for since the mortgage meltdown. However, if the appraisal gives you the equity to qualify for the loan, it makes sense to lock in at current historic low rates.

The 20 percent equity would keep a first mortgage at an 80 percent loan-to-value, so you wouldn’t have to pay private mortgage insurance. Even if you do have to pay for insurance, PMI doesn’t last forever, and it could still make sense to do the cash-out refinancing.

Take a look at Bankrate’s mortgage debt consolidation calculator for more help.

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