Student loan debt is a rising problem in America. Student loan debts amount to $1.5 trillion, and 44 million Americans are struggling to pay it. Because this burden is gradually building up, many homeowners are going for a new loan, which assists in paying off the loans. Now, the question that arises into mind is whether it is wise to borrow money from home equity to pay off student loans. Of course, there are advantages and disadvantages associated with deciding to accomplish this.
The Pros of refinancing to pay Student Loans
Refinancing and taking cash out to – pay student loans may be appropriate under specific circumstances. Here are some potential benefits:
Lower Interest Rate
The costs associated with student loans are usually slightly higher than the mortgage rates. For instance, the current interest rate on federal student loans for undergraduates is 4.99%. However, the 30-year fixed mortgage rate right now is about 3.3 %. In other words, refinancing your home mortgage to a cheaper rate allows the savings to meet higher costs incurred in paying a student loan.
Group Into One Payment
While having to make student loan repayments besides a mortgage payment feels like too much to bear. This makes it easier since refinancing enables you to combine the two debts to be paid in one amount only – each month.
Shorten Loan Term
Some opt to change their mortgage period and go for a shorter period of, for instance, 15 or 20 years instead of 30 years. Even though payments are higher, there is considerable savings in the interest cost over the term of the loan. Also, for each month, there’s more equity, which can be used to pay off student debt with additional payments.
Tap Equity
If you own a house that has appreciated, a cash-out refinance releases trapped home equity. You can tap this equity to wipe out student loans in a single operation totally.
How Refinancing Could Pay Off Student Debt: The Dangers
This is especially true when it comes to refinancing student loans as a solution is only sometimes the best. Here are some downsides to think through:
Closing Costs
To be able to refinance a mortgage, you have to incur some costs. Closing expenses amount to 3 percent to 6 percent of the total loan value, or origination costs, on a $250,000 mortgage, that’s $7,500 to $15,000. That means if you plan to sell soon after, you’ll likely not get a refund for those expenses.
Lost Tax Benefits
Student loans have some advantages, and to start with, they are tax deductible. The interest that can be deducted each year can be at most $2,500. Since you pay them off early by refinancing, you negate these deductions.
Equity Drain
However, tapping equity will erase the student debt and, in the process, dissipate the equity in your home. This undermines a parameter that you have been nurturing; it unbuilds. When you come back to refinance again or to move around, you will find that you need more equity.
Risk of Default
People tend to be out of jobs in times of financial crisis, and with a bigger mortgage balance, they are in a more difficult situation not to pay the loan or to lose their home to foreclosure. That is even more so if you took the cash-out refi instead of the rate-and-term refi.
Advice on the Student Loan Refinancing to Reduce Payments
If you’ve weighed the pros and cons and still want to refinance student loans, here are some tips:
Shop Multiple Lenders
Find out the lowest interest rate, possible interest rates, and terms offered by different lenders. Loan companies that are located online usually charge lower interest rates. Use your stakes to gain better offers than your competitors.
Regular Risk-On Strategies
A rate-and-term refinance is when you switch to a new mortgage at today’s rates without borrowing more money. That’s because, with a home equity loan, you are not borrowing additional money compared to a cash-out refi, which makes underwriting requirements less strict.
Look Into State Programs
Some states have a special mortgage program to cater to the payment of student loans through refinancing, and even if they don’t, they may offer assistance with below-rate or down payment. These are Rhode Island, Maryland, California, and Minnesota.
Don’t Grant More Adjustable Rates
It would help if you cut it further by taking another ARM. Also, of course, it may be tempting. But ARM rates do increase later, and you will find yourself still grappling with costs. Fixed rates are fairly better locked for any stability you may want to achieve.
Set Extra Cash Aside
In cases where you have availed certain loans, then make sure you release some income on a monthly basis to replenish the saved amount at a very fast rate. This way, you have some options up your sleeve in the event of financial misfortune in the future. Pay extra to save your home equity at the same time.
Key Takeaways: Is Refinancing to Pay Student Loans Worth It?
It could make sense to refinance student loans with a cheaper mortgage rate. However, it is laden with great danger to your monetary stability and your homestead if done in haste. Many times, before making a decision or jumping on a bandwagon, they keenly assess the benefits and disadvantages. Refinancing is best for certain borrowers such as:
For those who already set aside liquid cash in USAP, they are 15% for the extremes.
Mortgage applicants capable of securing far lower interest rates
Residential consumers who intend to remain in their current homes for still more years.
Those in the rate-and-term refi, not cash-out financing category
Homeowners who have enough income and home equity to afford them the better payment.
At worst, it could more than threaten your financial well-being and homeownership; refinancing out student debt could sink you. Approach it very cautiously, and analyze your finances before drawing on the home’s equity you have built.
Common Questions People have about Refinancing to Help with Student Loan
Should I use a HELOC instead of refinancing to clear student loans?
A HELOC, or home equity line of credit, will give you convenient access to your equity, but often with floating rates of interest. It also exposes your home in cases where one is unable to make payments on the loan that was offered to them. Fixed-rate refinancing is likely a safer way to use HELOC if you don’t pay that off as soon as possible.
Student Loan Refinancing Mortgage Lenders – Where to Find Them?
Most national lenders, such as loanDepot, SoFi, and LendingTree, have student loan refinancing mortgages. These allow you to consolidate both debts into one. This is because it is a lending model that is dominated by online lenders capable of providing some of the best rates on these niche loan products tailored for borrowers with student loans.
Should I refinance federal or private student loans?
While private student loans tempt people with their low interest rates, federal loans held by you might be eligible for special payment options and loan discharge. They note that it is almost never advisable to pay off federal loans early so that you can refinance them because you cannot do so with the federal loans. First, focus on refinancing higher risk, higher interest rate private student loans.
How much equity do I have to refinance student debt?
Banks typically require 15-20% equity for a refinance request before they agree to grant the request. The better the chances and the terms one can get depend on how much equity one has. If it is still lacking, then it is better to wait until there is enough equity by paying for more than the monthly mortgage to increase equity in the house.
Can refinancing actually have an impact on credit score?
In the case of the):( ), Any loan application involves a hard pull on your credit, which can drop your score by a few points for some time. However, if passed, a refi will be useful in the long run by reducing one’s overall utilization while also demonstrating credit credibility. Find ways to pay all outstanding debts on time in order to begin reconstructing the score.
