refinance

Frozen out during a cash-out refinancing

Don TaylorDear Dr. Don,
I have a problem because our lender doesn't want to proceed with a cash-out refinancing. Our home has a mortgage balance of $248,000, and it was recently appraised for about $350,000. We were in the midst of refinancing with my current lender to a lower rate and taking $20,000 out to pay some debts. But lately, the lender seems to be changing the rate and giving me a hard time about the cash I wanted to take out. I was advised to take a home equity loan to pay off my old mortgage and use the equity loan.

My existing mortgage rate is 4.625 percent and the new one with the home equity loan is 4.11 percent. How should I proceed?

Thanks,
-- Scott Spurned

Dear Scott,
Since the real estate bubble burst, lenders have been very cautious about new cash-out refinancing. The good news is that the situation is said to be improving, but your lender apparently didn't get the memo.

As of this writing, Bankrate's national average for a home equity loan is 6.16 percent, but your lender doesn't want you paying off other debts with this loan.

You have to decide what your goal is by refinancing. You have enough equity in your home to justify a cash-out refinancing, and you would not require private mortgage insurance, helping to keep costs low. If you fail to get the interest savings associated with restructuring your other debts, you would only be capturing about 0.5 percent interest savings on your existing mortgage balance alone.

Should you move forward to refinance without the cash-out? It depends upon closing costs and how long you plan to stay in the home. Bankrate's refinancing calculators can help you make that decision.

Another key decision is whether it makes sense to find a new prospective lender. Mortgage rates may be headed higher. So, by restarting the loan origination process, you could lose interest savings on the mortgage and face additional closing costs covering your $20,000 in consumer debt.

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