February 25, 2019
The equity in your home, when used correctly, can be a powerful tool in reaching your financial goals. As a homeowner with student loans, that equity can possibly help you lower your monthly payments and interest rates while finally getting out of student loan hell. (And remember: There isn’t any real tax benefit of carrying student loans.)
However, before you commit to using your home equity to pay off student loans, start by comparing your various options for tapping into your home equity. The last thing you want to do is trade one loan for another—potentially with worse interest rates or monthly payments that don’t work with your current financial situation.
According to Zillow, a cash-out refinance is great for paying off high-interest debts. However, you’ll want to make sure you can find lower interest rates. If much of your student debt is from high-interest private education loans, you may find the math works in your favor.
Interest rates for cash-out refinancing are generally lower than home equity loans and HELOCs, but don’t be fooled into thinking it’s the best option based on that one number. Factor in closing costs, how much interest you’ll pay over the term of the loan, private mortgage insurance, and any other fees that may come with a cash-out refinance to find the true cost. Calculate whether a cash-out refinance will lower your interest rate and, if it won’t, consider other ways to access your home equity.
Home Equity Loan
If you can’t find lower interest rates via a cash-out refinance, a home equity loan can give you access to cash without refinancing your home. This loan is separate from your mortgage and gives you access to the equity you’ve built in your home in one large lump sum.
With an average 5.5% interest rate for a 10-year fixed term, home equity loans may allow you to consolidate your student loan debt in one single payment at a lower interest rate. For a $100,000, 10-year loan, you can expect a monthly payment around $1,500, depending on your credit score. Estimate how much your monthly payments would be based on your home value, credit score, and other factors. If you can’t keep up with the monthly payments, you may want to forgo a home equity loan so you don’t risk losing your home.
If you don’t need money in one lump sum and want to withdraw it as you need it (up to a certain amount), a HELOC may be your best option. For Josh and his wife Lauren, bloggers at Money Life Wax, a HELOC offered a way to break through interest of student loans and start paying off the principal. “Instead of paying $325 in interest each month, we are paying closer to $80.”
However, HELOCS often have variable rate interest, meaning rates may go up and you can’t be certain about how much interest you’ll pay over the course of the term. As with a home equity loan, you want to estimate your payments based on your situation and, if the payments are too much, reconsider so you don’t risk foreclosure.
If you have equity built up in your home that you want to access but don’t like the idea of taking on additional debt or monthly payments (plus interest), a Hometap Investment can be a smart alternative. “This was a great choice instead of a second mortgage!” says John C., a homeowner who used Hometap to pay off education loans.
However, if you know you want to stay in your house for more than 10 years, Hometap may not be the best option for you as investments have a 10-year term. That means you have to sell your home, refinance, or buy back the investment within 10 years.
When you use your home’s equity as a tool, you have an opportunity to better your financial situation. But remember: Everyone’s motives and methods around financial decisions are personal; there’s no “right” answer besides the one that works for you.
Before you pay off your student loans using home equity or any other means, consult a financial advisor. A financial advisor can help you do all the math to see which options may provide you with the biggest benefits and offer you professional guidance as to what makes sense for you, taking into account advantages you may lose like federal student loan benefits.
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