I always caution my clients to be very skeptical about paying of unsecured debt with proceeds form refinancing your mortgage. Two reasons: (1) you're swapping unsecured debt for debt secured against your home and (2) the total interest you would pay on the unsecured debt, using a debt payoff plan, is probably far less than the additional mortgage interest you would pay for consolidating the debt.

For the past 5-6 years, banks, lenders, and the media have been gung-ho in convincing home owners to pay off credit cards and personal loans by taking out huge mortgages. Now many of those homeowners have no equity and are losing their homes.

At the moment, you are in a safe position on your home - your mortgage debt is low - perhaps low enough to pay off in a few years; and although you have debt, it is unsecured (which means in the event of a financial disaster, they're screwed - not you).

From your other post, it sounds like the lender is requiring about half of the unsecured debt to be paid off through the mortgage in order to bring your overall debt ratio down.This will give you cash in hand to make improvements, but it means half of your unsecured debt will remain (at a much higher rate of interest that the mortgage) and the other half will take up to 30 years to pay off. This might be the worst situation to be in the long run.

The main question is can you and your family plan and carry out an aggressive program to pay down the unsecured debt? Whether you refinance or not, some portion of that unsecured debt will remain, and if you choose to refinance, the new, higher mortgage will make disciplined savings and pay off even more important.

The second question is the rate and fees the lender has offered you. Without knocking any lender, I'd shop around.

The third question is cost. Let's assume you move forward. This means increasing your mortgage balance nearly 300%, extending your payoff date to nearly the middle of the century, and adding a substantial interest cost. Adding value to your home is important, but it is an intangible value until the day you sell. If that date is not on the horizon, don't count the increase in value in your benefit list.

Here are the conditions under which I would move forward if I were you:
1.) The rate of interest on the mortgage is as low as possible - around 5.00% to 5.50%
2.) The rate of interest on the unsecured debt is greater than 12%, or is variable, and I have no option to pay it off with a 0.00% credit card balance transfer
3.) The unsecured debt payments plus my current mortgage payment is much greater than the new mortgage payment plus payments on the unsecured debt
4.) Assuming I kept the same budget for debt payments after refinance, I could pay off the unsecured debt in 5 years and/or the new mortgage in less than 20

Remember how large your new mortgage balance will be. Think about how much higher your new payment will be - and how much of your monthly income it will take. Think about how much you're putting into savings.

Balance the above against the importance and value of the addition and improvements.

If you know a CPA or a Financial Planner, seek his/her advice.