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Should I Refinance My Home to Pay Off Student Loans?

Should I refinance my home to pay off student loans? No, refinancing your student loans as separate loans rather than combining them with your mortgage is the better option.

According to our data, fresh graduates are the second sector to have more than $200K in federal student debt in 2021.

Mortgage lenders may allow you to use the equity in your house to pay off student debts.

It’s called a “student loan cash-out refinance”, and is a kind of debt relief that removes financial obligations from your life.

On the other hand, if you use your home to pay off student debts, you risk exposing it if the final amount becomes too big for you.

It’s possible that refinancing your student loans one by one may let you pay off your student loans faster.

We’ll discuss different possibilities for answering the question of whether you should refinance your home to pay off student debts

What Is a Student Loan Cash-Out Refinance?

A student loan cash-out refinance is a type of mortgage in which you may use the equity in your current house to pay off your student loans.

To take advantage of cash-out refinance, you must meet the following requirements:

  • Make a loan payment in your name.
  • Repay one or more student loans in full.
  • Be sent to your student loan servicer at closing.

For example, if you owe $50,000 in student loans and own a home worth $300,000, your mortgage is $200,000.

You could borrow up to $250,000 through a student loan cash-out refinance and have the extra $50,000 provided by your mortgage lender to your student loan servicer.

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The Advantages of a Student Loan Cash-Out Refinance

A cash-out refinance can often get you a lower interest rate and put money back in your pocket. You can also simplify your payments by consolidating two or more loans into one.
Robert Humann

1. You May Qualify for Certain Tax Incentives

For example, the interest paid on a student loan is frequently deductible. Mortgage interest is also tax-deductible In certain situations.

The snag is that, in contrast to the student loan interest deduction, you’ll need to itemize your taxes to benefit from the mortgage interest tax reduction.

2. Simplify Your Payments By Combining Debts

Consolidating 2 debts into one streamlines your payments, allowing you to better organize your finances and ensure that you pay your due on time.

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3. You May Save Money by Getting a Better Rate

A student loan cash-out refinance is often less expensive than other forms of financing, such as home equity loans.

You’ll typically save money during the process if you meet the requirements.

However, if you lengthen the term, make sure you take into account the total interest cost as well.

The Drawbacks of a Student Loan Cash-Out Refinance

1. You Run the Danger of Being Foreclosed On

You’re converting unsecured debt into secured debt by refinancing your mortgage to pay off student loan debt.

Your property is used as collateral if you default on your new mortgage loan. If you can’t make your monthly mortgage payments, you risk losing your house.

2. You Lose Certain Borrower Protections

If you’re refinancing a federal student loan with cash out, the borrower protections that come with it are lost, including income-based repayment plans and generous hardship choices.

3. The Student Loan Debt Does Not Go Away

When you utilize a cash-out refinance to pay off your student debt, you’re relocating it from one location to another.

You may save money, but you’ll still have to pay it off.

If you default on a federal student loan, you could lose access to income-driven repayment plans and other protections. If the value of your home decreases, you could end up owing more on your mortgage than your home is worth. This could lead to a foreclosure if you can’t make your payments.
Robert Humann

Who Should Consider Using a Cash-out Refinance to Pay Off Student Debt?

The greatest motivation to do so is when the benefits outweigh the potential dangers.

Student loans should not be combined with secured debt, such as mortgages.

If you have a minimal student loan quantity or high-interest federal PLUS or private loans, this may be the case.

However, if you want to pay off your debt, there are a few more reasons to consider a student loan cash-out refinancing:

  • You’ll save money over other financing alternatives: A cash-out refinance of your student loan might provide you with better interest rates than a personal loan for a student loan. It also has fewer costs and more simplified eligibility criteria than a regular cash-out refinance.
  • Your debt precludes you from pursuing other alternatives: Your monthly mortgage and student loan payments might put your debt-to-income ratio above the threshold for obtaining other types of loans.
  • You’re not confident that you’ll be able to use the loan money to settle your obligation: Because student loan cash-out refinance funds are paid directly to your servicer, you won’t be tempted to spend them elsewhere.

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How Do You Qualify for a Cash-Out Refinance?

You’ll need a FICO score of 720 or better to take out a cash-out refinance. It’s advantageous if there are no outstanding mortgage, credit card, or other installments on your credit report.

Student Loan Cash-out Refinancing Alternatives

If you’re seeking to play it safer, you might consider other methods of paying down your student debt:

1. Refinance Your Student Loans Separately

When you refinance a student loan, a private lender pays off your outstanding balance and issues you a new loan based on your credit history.

If you qualify for a student loan with a lower interest rate, refinancing to a fixed-rate loan can help save money and lower monthly payments.

You can make bigger student loan payments and pay down the balance more quickly if you have savings.

While it is possible to refinance a federal student loan with a private lender, you will lose certain borrower rights.

You may also like: 5 Solutions If Your Student Loan Refinancing Denied

2. Make Biweekly Student Loan Payments

Consider this alternative if you don’t qualify for a mortgage refinance, don’t want to pay closing costs on a mortgage refinancing, or simply wish to take the easy way out.

The majority of borrowers are only required to make one student loan payment every month, but you could pay them twice a month.

You’ll pay off your student loan in half the time with biweekly payments.

You’ll make 26 half-payments, or 13 whole payments, throughout the year if you employ this approach.

You may use the same strategies that you used to pay off your credit card debt. Using this approach, you might be able to finish your repaying sooner and save money on interest fees.

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