Using a Home Equity Loan to Pay Off High Interest Student Loans
The strategy of dipping into your home equity in order to pay off another loan is called debt reshuffling, and is done through withdrawing mortgage equity, a home equity line of credit or cash-out refinancing. If you have hefty student loans then you may be considering this option. Essentially in order to do this you would be refinancing your current mortgage using a new loan, which would allow you to free up any cash that has already been paid on your mortgage. This new debt can then be used to pay off your remaining student debt. Although it may seem like a good idea, using a home equity loan to pay off your student debt can actually be very risky. Here are some things to keep in mind before using this strategy.
Why Use a Home Equity Loan to Pay Off Student Loans?
There are several advantages to this strategy. One advantage is that doing so often allows people to take advantage of a lower interest rate, which will save them money through lower monthly payments. Another benefit is that some people may be eligible to enroll in a special program such as a tax break program or one with government benefits.
Mortgages and Student Loans Don’t Mix
Mortgages are considered a type of secured debt. This means that it is tied to an asset, which in this case is your home. Your house is the collateral against the debt that you owe. If you are unable to make your mortgage payments for any reason then the bank has the right to seize your home for foreclosure. On the other hand, a student loan is an unsecured debt, and so the bank is unable to seize any asset such as your house or your car if you aren’t able to make your student loan payments on time. Another difference is that you can declare bankruptcy if you are not able to pay your mortgage, however you can’t do the same for your student loans. This all means that if you move your student loans to your mortgage and end up not being able to afford to make the payments then this will put your home at risk of being seized. However, on the other hand you will be able to declare bankruptcy.
The Interest Rates Aren’t That Great
You may not actually be saving that much money by switching your student loan debt to mortgage debt. If you do have a higher interest rate on your student loans than on your mortgage then you may save money by rolling over your student loan debt, however this is not always the case. Some student loans will in fact have lower interest rates than that of a home equity loan, and so there may be no such advantage to rolling over your debt. On top of this, refinancing your student loan by turning it into a mortgage may extend the term of your student loan debt by a decade or more, which will actually make you lose thousands of dollars in paying interest over a longer period of time.
Hidden Terms and Costs
If you are considering this option then make sure to include all of the closing costs when you are doing a financial analysis, as this can add a substantial amount of money to the final cost of your home equity loan. On top of this, ensure that you’re aware of unfavorable terms that can lead you to be trapped in a variable interest rate loan. Also, keep in mind that the longer the term of your home equity loan the more interest you will pay.
Do Your Homework
It is crucial that you speak to a licensed mortgage broker or a certified financial professional before you decide to pursue this strategy to ensure that it is actually a beneficial financial move for your specific situation. Keep in mind that there is many other student loan repayment options that could help you repay your debt without having to involve putting your house at risk through a home equity loan. Make sure that you look into student loan refinancing before you look into obtaining a home equity loan, as this is a much safer way of repaying your student debt.