The coronavirus pandemic has put economic strain on many American homeowners, especially those with student loans. Although the Coronavirus Aid, Relief and Economic Security (CARES) Act has temporarily helped – at least for those on federal student loans – those protections are almost complete, and many borrowers are looking for ways to manage their payments and stay afloat.
If you are one of them Refinance Your Mortgage Credit could be on your mind. With a cash-out refinancing, you can take advantage of the market record low mortgage rateswhile paying off your student loans (or other debts or bills) at the same time.
But is it a good idea? And what would that mean for your finances in the long run? According to experts, there is a lot to consider here.
Pay off your student loan with refinancing
With a mortgage refinancing, you can safely pay off your student loans. To do it you need one Cash-out refinancingwhich means you are taking out a new mortgage loan that is greater than the balance of your current loan. These funds are then used to pay off the old loan and you keep the difference in cash.
This money can be used to pay off your student loans or other debts that you may have to deal with. It is technically a way to “roll” your student loan and other debts into your mortgage loan and pay them off over time.
Lauren Anastasio, certified financial planner at SoFi, explains: “Adding your student loan debt to your mortgage can be a great solution for many borrowers. By using a mortgage to pay off your student loan, you can set a very low interest rate for up to 30 years, which can reduce the monthly student loan obligation and improve your monthly cash flow. “
If you are considering mortgage refinancing, Use the online Credible marketplace to compare lenders and see if you are eligible to grab some of the best prices available.
Potential pitfalls in refinancing to replace student loans
While mortgage refinancing can be used to pay off student loans, it may not always be the best choice. For one, you still owe the money – just to another lender. Depending on the types of student loans you have, you can also lose valuable benefits (e.g. Income-based repayment planswhich are only available on federal student loans).
You also have less equity in the house. That means less profit on sales. In fact, if property values in your area go down, you could flood your loan – meaning you owe more than the home is worth.
The biggest downside, however, is that you put your home at risk. No collateral is required for student loans. So if you get into tough times and can’t make your payments, your creditworthiness will suffer – but you won’t lose an asset. With a mortgage, your home is security. If you cannot make these payments, you can lose your home. As Evi Kokalari-Angelakis, CEO of Golden Key Realty puts it, “If you don’t pay the student loan, your loan will be ruined, but you still have a roof over your head.”
If you cannot afford your student loan payments, you should simply refinance those loans instead. This ensures that your home is not at risk and you could lower your rate and payment. Just make sure you use a tool like Credible to search for it Refinancing rates for student loans, as these can vary greatly.
This is how you do it right
If you are considering taking the risk and refinancing your student loans, experts say you should take a few steps before you dive in.
- Step 1: Make sure you have enough equity
- Step 2: Pay attention to the term
- Step 3: Do you know what types of credit you have
- Step 4: Understand the cost – and the break-even point
Step 1: make sure you have enough equity
“You need to know the value of your home to determine how much equity is in it,” said Leslie Tayne, founder of the Tayne Law Group. “Equity is the amount owed versus its current value when you sell it in the market. Use this information to determine whether you have enough equity to securely take out the loan to pay off all student loans. “
With interest rates so low, now may be a good time for you to consider refinancing your home or using your home equity for a loan. Consider using Credible to look into all of your mortgage refinancing options, and find out the plans you qualify for today.
Step 2: pay attention to the term
The length of your new mortgage loan will affect your long-term costs. So keep this in mind when weighing your options. For example, Refinancing into a mortgage loan with a term of 30 years Now this may mean a lower monthly payment and interest rate, but when you calculate the amount of interest paid over 30 years it is actually much more than you would pay for your student loans as they are.
Step 3: Know What Kinds of Loans You Have
Be careful when refinancing federal student loans. “While refinancing can lower interest rates, borrowers lose the benefits they currently have on a government student loan, which can include income-based repayment plans, loan deferrals, deferrals, and public service loan waivers,” said Tayne.
Step 4: understand the cost – and the break-even point
Refinancing is not free. Add up any closing costs and fees you pay for the refinance and make sure you stay home long enough to get these back.
“Depending on the price difference and the closing costs for your property, the total costs can be amortized within a few months to a few years,” said Anastasio. “Usually it only makes sense to keep the property for at least a couple of years, but to get an accurate estimate, ask a lender for a break-even analysis so you know exactly how many months are in your new one Condition are mortgage that it takes to break even and save money. “
Shop before refinancing
Whether you choose to refinance your mortgage or just refinance those student loans, shopping is crucial if you want the best interest rate. Use a tool like Credible to compare your options.
For example, to compare student loan refinancing providers, easy Enter your desired loan amount and estimated credit score into Credible’s free online tool and see which tariffs you qualify for.