Should you Use Home Equity to Eliminate Student Debt?

You feel like you are drowning in student debt so you assume that you should use your home equity to get rid of it. While it sounds like a novel idea since you will likely pay lower interest rates and you’ll only have one loan to pay, it’s only right for certain people.

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Keep reading and we’ll tell you what to consider.

Do you Have Federal Student Loans?

First, you need to know what type of student loans you have. Are they federal student loans or private loans? If they are federal loans, you have many avenues to exhaust before you make a decision. Many people with federal student loans have the option to enter an income-based repayment plan or have their loans forgiven at a certain point. If you refinance your federal student loans, though, you lose any and all of these benefits.

If you aren’t sure what type of loans you have, contact your loan servicer. Not only can they tell you what type of loans you have, but they can also advise you on your options. Many people don’t even realize that they are eligible for loan forgiveness or repayment plans.

Can you Afford the Payment?

Here’s the biggest issue with refinancing student debt into your mortgage – you refinance unsecured debt into secured debt. If you defaulted on your federal loans, no one could come take your home from you. Yes, you’ll pay the consequences in other ways, but you won’t lose your home.

If you wrap the debt into your mortgage, your home becomes the collateral for your student loans. Now, this isn’t the end of the world if you know you can afford the payments beyond a reasonable doubt. If you take a payment that you aren’t sure if you can afford or not, especially down the road, you may want to explore other options.

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How Much Time is Left on Your Student Loans?

When you wrap your student loans into your mortgage debt, you probably extend the term that you pay on them. For example, let’s say you had a 10-year student loan term and you already paid 3 years on it. Now you have 7 years left, but want to refinance it into your mortgage. If you take a 30-year mortgage like many people do, you just turned that 7-year debt into a 30-year debt. That means that you pay interest 23 years more if you refinance the debt into your loan.

Have you Tried Refinancing With your Current Lender?

Finally, make sure that you ask your current lender about your refinancing options. If you have private student loans, your lender may have options for you to help make your payments more affordable. While you won’t get loan forgiveness plans like you would with federal student loans, you may have other options. Lenders often offer programs just to keep your business, which may make your loan terms more affordable for you.

Using Home Equity for Your Student Loans

If you do use home equity for your student loans, try minimizing the term as much as possible. Rather than wrapping the debt into your first mortgage for 30 years, consider a second mortgage. You can get a home equity loan for 10 or 20 years. You can even pay those loans off early if you have the money to do so, minimizing the interest you pay even further.

Using home equity to refinance your student loans can be a good option if you go about it the right way. Make sure that you exhaust all of your options before deciding to use your home’s equity. If you do wrap the debt into your mortgage, pay close attention to the term and the total cost of the interest over the life of the loan to help you make your decision.

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