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Refinance, or not

Question: I own a home which I'm in the process of refinancing under the Keeping Homes Affordable program. As part of the refinancing, the mortgage lender wants to subordinate my home equity line of credit (which is through a different lender - my bank) to the mortgage. In order to do this, my bank wants to lower my line of credit from $28,000 to $10,000 and they want to freeze it for the time being.

I'm very uncomfortable with this as it has been serving as my "safety net" to pay for unexpected expenses in the past year, which I know isn't ideal, but things have been challenging economically because I've had to take a 20% pay cut at my job for the past 9 months. In the long run, refinancing will save me thousands of dollars, but it will also extend my mortgage 5 years and could put me in a difficult situation if anything happens in the short term. What should I do? Laura, Minneapolis, MN

Answer: I understand your trepidation. Pay cuts are tough to absorb, especially when it's unclear when you'll get back to par. My bet is that it won't happen anytime soon. Companies are in no hurry to act with an unemployment rate of 10.2% and the broadest measure of underemployment at a record 17.5%.

That said, from what you've told us the refinancing is putting you on the path toward a stronger financial position. I would take the lower line of credit limit. I would focus on reducing your spending--yes, budget--to shore up your savings instead. Of course, it's always easy for me or anyone else to say "budget." It's always hard to make cuts in spending. Nevertheless, It will pay off for you to go over your spending carefully, see where you can nip and tuck, and add to your savings. The sums may not seem like much at first. But save a bit here and a bit there and all of a sudden your talking real money.

By the way, there should be no prepayment penalty with your mortgage. So, when your income and finances take a turn for the better you can always start paying off your mortgage more aggressively.

What do other members of the Getting Personal community think? Send Laura your thoughts and suggestions.

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