One weird trick to eliminate student loans through home refinancing
July 27, 2022 12:09 PM Subscribe
You are not my financial advisor. Apart from that imagine I were to do this:
Wait until I have enough equity in my house and the interest rates are more favorable, do a cash-out refinance of my mortgage and use the cash to pay off my ~70k in student loans.
What could go wrong? Is this somehow illegal?
Public interest forgiveness is not an option for me. This seems like it has at least two advantages:
1. Although the interest rate situation is not great right now, if we get back to low rates, I can get a better interest rate.
2. If I had a serious adverse life event, my student loan debt is now gone. I can just let the bank take the house and not have student loan payments for at least the next 20 years.
3. If my home continues to increase in value, maybe one day I can just sell it and boom, my loans are paid off, for "free".
Is there any downside to this plan besides closing costs on refinancing? I feel frankly shackled to these student loans, which will never go away, even if I was homeless and living in a ditch, they'd still be trying to track me down. This way if the worst happens, at least I don't have these stupid loans anymore. This idea does make me feel some guilt, that such an option might be possible to me only because I have been lucky enough to be able to own a home, but I can live with that guilt.
Public interest forgiveness is not an option for me. This seems like it has at least two advantages:
1. Although the interest rate situation is not great right now, if we get back to low rates, I can get a better interest rate.
2. If I had a serious adverse life event, my student loan debt is now gone. I can just let the bank take the house and not have student loan payments for at least the next 20 years.
3. If my home continues to increase in value, maybe one day I can just sell it and boom, my loans are paid off, for "free".
Is there any downside to this plan besides closing costs on refinancing? I feel frankly shackled to these student loans, which will never go away, even if I was homeless and living in a ditch, they'd still be trying to track me down. This way if the worst happens, at least I don't have these stupid loans anymore. This idea does make me feel some guilt, that such an option might be possible to me only because I have been lucky enough to be able to own a home, but I can live with that guilt.
We did this in early 2021 to pay off the private portion (about $30K) of Mrs Bassooner's student loans. Because we were refinancing at a lower rate, our monthly mortgage payment stayed flat even though we were taking cash out. No regrets so far.
We did consider that paying off her public loans would prevent us from taking advantage of any potential student loan forgiveness or interest waivers that might happen, which is why we only paid off the private loans. There also aren't standard deferrals available on mortgages when going back to school, and there aren't income-based repayment options like Crystalline mentioned.
Depending on how your student loan repayment plan is configured, the term of the mortgage, and how far into each you are, it has a good chance of causing you to pay more total interest over the life of the mortgage (esp if you're refinancing into a 30-year). It also makes your taxes a bit trickier, because technically mortgage interest on any part of the cash-out you use for loan payoffs or anything other than home improvements is not tax deductible.
posted by bassooner at 12:28 PM on July 27, 2022 [1 favorite]
We did consider that paying off her public loans would prevent us from taking advantage of any potential student loan forgiveness or interest waivers that might happen, which is why we only paid off the private loans. There also aren't standard deferrals available on mortgages when going back to school, and there aren't income-based repayment options like Crystalline mentioned.
Depending on how your student loan repayment plan is configured, the term of the mortgage, and how far into each you are, it has a good chance of causing you to pay more total interest over the life of the mortgage (esp if you're refinancing into a 30-year). It also makes your taxes a bit trickier, because technically mortgage interest on any part of the cash-out you use for loan payoffs or anything other than home improvements is not tax deductible.
posted by bassooner at 12:28 PM on July 27, 2022 [1 favorite]
There's nothing illegal about using a loan to pay off another loan, and it shouldn't matter that the second loan is secured by your house. You would need to look at the terms of the HELOC to make sure that you aren't required to promise you will use the money only for house purposes. I don't know if that is normal/typical, but I am pretty sure HELOCs I have had did not say anything like that. Also, if you are using the HELOC money for non-house purposes, you should not assume that you can take a tax deduction for the HELOC interest (i.e., the mortgage interest deduction).
On point #2 - are you sure a HELOC is "nonrecourse" in your state? If no, you should check this. On point #3 - money is fungible so you could just as easily skip the HELOC, sell the house one day, and pay the loan with the proceeds. In other words, the HELOC doesn't really change anything in this scenario.
posted by Mid at 12:29 PM on July 27, 2022
On point #2 - are you sure a HELOC is "nonrecourse" in your state? If no, you should check this. On point #3 - money is fungible so you could just as easily skip the HELOC, sell the house one day, and pay the loan with the proceeds. In other words, the HELOC doesn't really change anything in this scenario.
posted by Mid at 12:29 PM on July 27, 2022
If they’re private loans, I would say go for it. If they’re public loans, I wouldn’t. You can’t put mortgage payments on hold, but with public student loans you can. You can’t “pay ahead” on a mortgage (no matter how much you pay this month, you still owe next month’s payment) but you can with student loans. I would pay off any private loans immediately if given the opportunity, but public student loan debt tends to have fairly favorable terms. Only you know your particular loan agreement, and any advice here is kinda just a guess. Sitting down with a financial planner at a credit union is typically free and they’re qualified to read your loan terms and give you advice that’s specific to your own situation. Right now is probably a great time to get that advice, since interest rates are likely not in favor and it gives you some time to digest and consider the options.
posted by Bottlecap at 12:37 PM on July 27, 2022 [1 favorite]
posted by Bottlecap at 12:37 PM on July 27, 2022 [1 favorite]
If I had a serious adverse life event, my student loan debt is now gone. I can just let the bank take the house and not have student loan payments for at least the next 20 years.
In the event of a serious adverse life event, it's much better to let your student loans go into default than to lose your home.
posted by ThePinkSuperhero at 12:57 PM on July 27, 2022 [11 favorites]
In the event of a serious adverse life event, it's much better to let your student loans go into default than to lose your home.
posted by ThePinkSuperhero at 12:57 PM on July 27, 2022 [11 favorites]
Best answer: Yes, you're substituting secured for unsecured debt. Usually, that is a bad trade. For the federal portion of your loans, which at least can peg payments to income, I absolutely wouldn't. For private student loan debt with a very high interest rate, it might be a judgment call.
If your state is a recourse state, you will technically still owe any deficit after foreclosure. Not fun. Especially because if you pull all the equity out of your home, there's a market crash, and you lose your job, you may well end up underwater on your home. So that's the major risk. Set against private loans at 14%, I might consider it. But you're being awfully cavalier about losing your home.
posted by praemunire at 1:08 PM on July 27, 2022 [2 favorites]
If your state is a recourse state, you will technically still owe any deficit after foreclosure. Not fun. Especially because if you pull all the equity out of your home, there's a market crash, and you lose your job, you may well end up underwater on your home. So that's the major risk. Set against private loans at 14%, I might consider it. But you're being awfully cavalier about losing your home.
posted by praemunire at 1:08 PM on July 27, 2022 [2 favorites]
When you sit down with a planner, it is also worth considering what loans are dischargeable during bankruptcy. Student loans are often much more difficult if not impossible to discharge that way. (Note I’m not suggesting you *plan* for bankruptcy, but it is one possible response to various Serious Life Events). However you have to balance that against whatever protections might exist for a primary residence and what sort of income-based repayment might be available for the student loans. Some of the details will depend on what kind of loans you have and the laws in your state, which is why it’s a good idea to talk to an expert.
posted by nat at 1:32 PM on July 27, 2022 [1 favorite]
posted by nat at 1:32 PM on July 27, 2022 [1 favorite]
One factor to consider is that you may be able to negotiate a lower lumpsum payoff amount for your student loans. My state lender was willing to knock $15k off of my total loans (largely some penalties related to a short period of default) when I paid them off in full.
posted by kimdog at 3:00 PM on July 27, 2022 [1 favorite]
posted by kimdog at 3:00 PM on July 27, 2022 [1 favorite]
This idea does make me feel some guilt, that such an option might be possible to me only because I have been lucky enough to be able to own a home, but I can live with that guilt.
I just want to say that, from my perspective, if you never pay another cent toward your student loans you should feel zero guilt over that. You should have been able to go to college for free.
I feel frankly shackled to these student loans, which will never go away, even if I was homeless and living in a ditch, they'd still be trying to track me down.
So make them track you down. If your loans are federal, they'll eventually garnish tax refunds (in which case, don't overwithhold throughout the year) or social security payments; you'll still have a house. If they're private loans, they may have bounced from bank to bank over the years and the eventual owner might not even be able to prove in court that they own the debt. In the interim, they'll offer a lot of settlement options. Even if you go to court, you can still enter into a payment plan or settlement. Don't give up your house; don't make their job easy. They can't foreclose on the education you received.
If you want to ease your worry, consider meeting with a bankruptcy lawyer and a financial planner in your state to understand how a default would actually play out for you under different scenarios and what your options are for protecting your assets and your ability to finance basic needs as you age.
posted by ohneat at 4:07 PM on July 27, 2022 [1 favorite]
I just want to say that, from my perspective, if you never pay another cent toward your student loans you should feel zero guilt over that. You should have been able to go to college for free.
I feel frankly shackled to these student loans, which will never go away, even if I was homeless and living in a ditch, they'd still be trying to track me down.
So make them track you down. If your loans are federal, they'll eventually garnish tax refunds (in which case, don't overwithhold throughout the year) or social security payments; you'll still have a house. If they're private loans, they may have bounced from bank to bank over the years and the eventual owner might not even be able to prove in court that they own the debt. In the interim, they'll offer a lot of settlement options. Even if you go to court, you can still enter into a payment plan or settlement. Don't give up your house; don't make their job easy. They can't foreclose on the education you received.
If you want to ease your worry, consider meeting with a bankruptcy lawyer and a financial planner in your state to understand how a default would actually play out for you under different scenarios and what your options are for protecting your assets and your ability to finance basic needs as you age.
posted by ohneat at 4:07 PM on July 27, 2022 [1 favorite]
Best answer: I am not your financial advisor.
I have done this personally more than once.
I have worked in banking.
What you are doing is standard practice debt consolidation through cash-out refinance of your primary debt obligation. Typically in a cash-out refinance for debt consolidation you will declare that debt consolidation is your goal and you will then be required to identify the debt you are going to consolidate. The "cash-out" portion will not be paid to you to pay off your student loans. It will be paid by your mortgage lender to your student loan servicer directly. Again, this is standard practice so there's nothing illegal or wrong about it and if there are requirements or considerations your mortgage lender will advise.
If you are not alerting your mortgage lender that you are undertaking a refinance for debt consolidation, you will need to indicate otherwise what the cash-out is for. In that case you would simply be saying, "I personally want the cash."
Debt consolidation is the #1 reason for cash-out refinancing of a home mortgage. There is zip, zero, nada, nothing weird about it. No reason not to state your intentions and let them handle the payments and requirements. Your student loans are also going to be factored into your eligibility for refinancing rates, etc. anyway. So if you declare that you're using cash-out in the refinance to pay them off, the refinancing terms are very likely to be more favorable for you.
posted by desert exile at 4:37 PM on July 27, 2022 [4 favorites]
I have done this personally more than once.
I have worked in banking.
What you are doing is standard practice debt consolidation through cash-out refinance of your primary debt obligation. Typically in a cash-out refinance for debt consolidation you will declare that debt consolidation is your goal and you will then be required to identify the debt you are going to consolidate. The "cash-out" portion will not be paid to you to pay off your student loans. It will be paid by your mortgage lender to your student loan servicer directly. Again, this is standard practice so there's nothing illegal or wrong about it and if there are requirements or considerations your mortgage lender will advise.
If you are not alerting your mortgage lender that you are undertaking a refinance for debt consolidation, you will need to indicate otherwise what the cash-out is for. In that case you would simply be saying, "I personally want the cash."
Debt consolidation is the #1 reason for cash-out refinancing of a home mortgage. There is zip, zero, nada, nothing weird about it. No reason not to state your intentions and let them handle the payments and requirements. Your student loans are also going to be factored into your eligibility for refinancing rates, etc. anyway. So if you declare that you're using cash-out in the refinance to pay them off, the refinancing terms are very likely to be more favorable for you.
posted by desert exile at 4:37 PM on July 27, 2022 [4 favorites]
Addendum: Someone above mentions a HELOC (home equity line of credit). A mortgage refinance (cash-out or otherwise) is not a HELOC. Those are two entirely different things.
posted by desert exile at 4:41 PM on July 27, 2022 [3 favorites]
posted by desert exile at 4:41 PM on July 27, 2022 [3 favorites]
Addendum 2: There is no way I or probably anyone would advise taking out a HELOC to pay off a student loan. Again, two different things. But doing a cash-out refinance of a mortgage to consolidate debt? That is very often a primary and best practice debt consolidation move, assuming the rates and such make sense otherwise. You are not in that case "using one loan to pay off another" at all. You are refinancing a primary loan on better terms, and the mortgage lender is paying out the difference to you. And then you are simply redirecting that payment that is otherwise coming to you to your student loans.
Standard.
posted by desert exile at 4:53 PM on July 27, 2022
Standard.
posted by desert exile at 4:53 PM on July 27, 2022
You are not in that case "using one loan to pay off another" at all. You are refinancing a primary loan on better terms, and the mortgage lender is paying out the difference to you. And then you are simply redirecting that payment that is otherwise coming to you to your student loans.
This doesn't describe the typical situation. If you are just refinancing your house (no cash-out) due to interest rates dropping, you would start with a mortgage of say $100,000 at 5%, and after refinancing (ignoring fees and so on) you would have a mortgage of $100,000 at, say, 4%.
But if you were doing a cash-out refinance to pay off $20k in student loans, you would start with that same mortgage of $100,000, and after refinancing and being given your cash you would owe $120,000 (again, ignoring fees and so on).
Like others have said, using house equity (either by refinancing or getting a HELOC or home equity loan) to repay higher-interest debt is a totally normal thing. It adds some risk but also is one of the few ways most people have of accessing lower-interest loans.
posted by Dip Flash at 5:16 PM on July 27, 2022 [1 favorite]
This doesn't describe the typical situation. If you are just refinancing your house (no cash-out) due to interest rates dropping, you would start with a mortgage of say $100,000 at 5%, and after refinancing (ignoring fees and so on) you would have a mortgage of $100,000 at, say, 4%.
But if you were doing a cash-out refinance to pay off $20k in student loans, you would start with that same mortgage of $100,000, and after refinancing and being given your cash you would owe $120,000 (again, ignoring fees and so on).
Like others have said, using house equity (either by refinancing or getting a HELOC or home equity loan) to repay higher-interest debt is a totally normal thing. It adds some risk but also is one of the few ways most people have of accessing lower-interest loans.
posted by Dip Flash at 5:16 PM on July 27, 2022 [1 favorite]
Given the likely significantly lower interest rates, this seems like a good idea on the surface, but don't forget to consider the life of the loan - moving from 15% for a 5-year loan to 5% for a 30-year loan doesn't work out well in the long run, for example (totally made-up figures, of course) because you'll pay far more overall.
Also, you're basically gambling that your house will appreciate more than the extra amount you add to the loan. A few years ago and with 20-20 hindsight, this would have been a great idea. How much more is your house going to appreciate over the next 5-10 years is something you need to objectively consider.
As others have mentioned, it's likely you'll be able to bargain down the loan amount in return for full payment. Depending on the mood of whoever owns the debt, this might be considerable and that could well be the factor that turns this from a maybe into a great idea.
posted by dg at 6:36 PM on July 27, 2022
Also, you're basically gambling that your house will appreciate more than the extra amount you add to the loan. A few years ago and with 20-20 hindsight, this would have been a great idea. How much more is your house going to appreciate over the next 5-10 years is something you need to objectively consider.
As others have mentioned, it's likely you'll be able to bargain down the loan amount in return for full payment. Depending on the mood of whoever owns the debt, this might be considerable and that could well be the factor that turns this from a maybe into a great idea.
posted by dg at 6:36 PM on July 27, 2022
Best answer: This doesn't describe the typical situation. If you are just refinancing your house (no cash-out) due to interest rates dropping, you would start with a mortgage of say $100,000 at 5%, and after refinancing (ignoring fees and so on) you would have a mortgage of $100,000 at, say, 4%.
But if you were doing a cash-out refinance to pay off $20k in student loans, you would start with that same mortgage of $100,000, and after refinancing and being given your cash you would owe $120,000 (again, ignoring fees and so on).
Yes but in a cash-out refinance with debt consolidation as the goal your aim is to secure $120K total overall on terms that put you in a cash-positive position relative to both the original mortgage loan, the original student loan, and the increased equity in the house (earned or appraised or very likely both). This seemed to be what the OP was inferring as the goal.
That may or may not equal a lower interest rate for the new home mortgage and it may or may not equal a higher overall loan amount and it may or may not equal the same payoff term dates, and etc. All these variables are in play, and they need to be put into play in a strategic way that is a net positive for you per this goal, not a wash and surely not a net negative. That won't be done for you when you refinance a mortgage unless you state what your goals are. If you simply say "I want additional debt of $20K from you, mortgage bank, attached to my house" -- I mean sure, you'll get that and they will be happy to give it to you, few questions asked. :)
Same as if you said, "I want a lower interest rate." Cool. The next question is: "What is your goal: Do you want to do that in a way that that you have a lower monthly payment or a lower overall loan amount?"
I guess what I am saying in summary is: yes, great idea, and make sure to state your actual goal so you can get the refinance scenario you actually want and make sure you shop that scenario to multiple banks and mortgage brokers. "I need $20K cash right now" isn't ever going to be the goal. The goal is putting you in a cash-positive position relative to all your student debt using your home as the primary leveraging tool. Totally standard.
posted by desert exile at 6:50 PM on July 27, 2022
But if you were doing a cash-out refinance to pay off $20k in student loans, you would start with that same mortgage of $100,000, and after refinancing and being given your cash you would owe $120,000 (again, ignoring fees and so on).
Yes but in a cash-out refinance with debt consolidation as the goal your aim is to secure $120K total overall on terms that put you in a cash-positive position relative to both the original mortgage loan, the original student loan, and the increased equity in the house (earned or appraised or very likely both). This seemed to be what the OP was inferring as the goal.
That may or may not equal a lower interest rate for the new home mortgage and it may or may not equal a higher overall loan amount and it may or may not equal the same payoff term dates, and etc. All these variables are in play, and they need to be put into play in a strategic way that is a net positive for you per this goal, not a wash and surely not a net negative. That won't be done for you when you refinance a mortgage unless you state what your goals are. If you simply say "I want additional debt of $20K from you, mortgage bank, attached to my house" -- I mean sure, you'll get that and they will be happy to give it to you, few questions asked. :)
Same as if you said, "I want a lower interest rate." Cool. The next question is: "What is your goal: Do you want to do that in a way that that you have a lower monthly payment or a lower overall loan amount?"
I guess what I am saying in summary is: yes, great idea, and make sure to state your actual goal so you can get the refinance scenario you actually want and make sure you shop that scenario to multiple banks and mortgage brokers. "I need $20K cash right now" isn't ever going to be the goal. The goal is putting you in a cash-positive position relative to all your student debt using your home as the primary leveraging tool. Totally standard.
posted by desert exile at 6:50 PM on July 27, 2022
« Older Hashtags for Wedding Vendors; What's the Etiquette... | Started running: did I permanently wreck my knees... Newer »
This thread is closed to new comments.
Also, I think there are many more repayment options for student loans even if that leaves you further in debt technically. But there are less repayment options for a mortgage. One more directly affects your housing.
I can’t speak to anything else and I think you should visit a professional.
posted by Crystalinne at 12:19 PM on July 27, 2022 [1 favorite]