Financial crunch is one of the most common problems of the year 2020. COVID-19 has disrupted our normal lives having a direct impact on our financial status. Many have lost their jobs and have settled for lower wages. With support under the Coronavirus Aid, Relief, and Economic Security (CARES Act)*, many individuals received temporary relief and protection from paying off only federal student loans**. Now, even the protection is up, and many young Americans are identifying ways to source funds to pay off their student loans.
The amount of student debt in America has been increasing over the years. In the year 2019, young Americans owed around $1.6 trillion student loan debt***. Hence, with the rising debt, many young individuals are finding it difficult to pay off loans and start a family.
If you are under stress and need funds to pay off your financial obligations, refinancing your mortgage can be a great idea. Globally, we are witnessing the lowest home loan interest rates. Hence, arranging cash be refinancing at the lowest mortgage rates is the best way to pay off your student loans.
How to Pay Off Your Student Loan by Mortgage Refinancing?
Refinancing your house loan is nothing but replacing your existing loan with that of a new loan at a lower interest rate and larger amount. It is also referred to as a cash-out refinance. By this method, you take a new and higher mortgage loan to pay off your old home loan and get cash by the difference in loan balances.
With that extra cash, you can easily pay off your student loan and settle an old debt. The most common reason for refinancing mortgage loans is lower interest rates when compared to the original interest. Hence, rolling your student loan into a mortgage loan can generate extra funds for paying off debts.
4 Things to Consider Before Refinancing
Refinancing is a major task and must be carefully planned to avoid pitfalls. Bringing the plan into action requires introspection. Firstly, you need to check your financial status before taking the risk of refinancing. Here are four certain steps that you should consider before choosing the option of refinancing.
Check your Equity- Have a look at the valuation of your equity before applying for refinancing. It may be the case that with your asset, you may not get a higher mortgage loan. Before refinancing, your income and credibility will also be verified again. The benefit of refinancing is when you can generate a higher difference in cash to repay the student loan.
Read the terms and conditions- Don’t just jump into the pool of risk. Read the terms and conditions of refinancing carefully and then make a rational decision.
Check your liabilities- When you refinance with a larger amount, your debt invariably increases. As such, before increasing your financial burden, check all your existing debts such as personal loans, credit card bills, and income. Do not mistakenly create a situation where your debts are more than your current income.
Understanding the phenomena of break-even point- Break-even point means a situation of “no profit no loss.” In your case, it would mean that your income equals your debt. It is advisable not to take so much debt that you are unable to save money.
Who Should Apply for Refinancing?
Though it’s not preferable to add unsecured loans to your collateral loans, there may be additional reasons to consider a cash-out refinance.
Comparing lending options– If you consider other lending options such as personal loans, credit card EMIs, and home equity line of credit, mortgage refinancing is the cheapest option. You can leverage the benefit of low-interest rates on home loans in the current scenario.
Being disqualified for debt options– If your debt to income ratio is too high, that means your debts are more than your income, and you would be surely disqualified from debt. Combining both the loans into a single option may increase your credibility.
Trust issues- As the difference in cash goes directly to the lender, you won’t be tempted to use the money for other purposes. If you are a spend-thrift, avoid looking for other options of debt and choose mortgage refinancing.
How can the refinancing of mortgage work for you?
If you own equity, you can use it to repay student loans. With low-interest rates, you can reduce your monthly payments and save money. Cash-out refinancing has fees, but if you are paying off a student loan, it can be waived off.
To pay off loans, you need sufficient equity. If you’ve paid off enough value on your home, you can use that as leverage for your mortgage refinance. A cash-out refinance works the same as a regular mortgage refinance.
Possible Risks of Refinancing Mortgage
Though refinancing a mortgage is a feasible option to pay off your student loans, it still has a few risks associated.
Home is attached as collateral– To pay off your student loan, you have to attach your home equity as collateral. The risk is that if you default on repayment, you will lose your asset.
No protection against mortgage loans– Federal student loans provide protections that help the borrowers during tough financial times. If you have a high financial burden, making monthly payments would be challenging. Mortgage loans do not offer any protection if you make a default.
Miss tax deduction opportunities–
If you have a student loan, you can claim student loan interest as a tax deduction. However, if you roll your student loan into a mortgage, you cannot claim tax deductions.
Benefits of Refinancing Mortgage
Ease in repayments– Getting a mortgage to refinance can make it easier for you to pay off student loans. You get a lump sum amount as a cash balance that can be used to make monthly instalments.
Leverage lower interest rates– Currently, we are witnessing the lowest interest rates on mortgages. This is the time when you can take advantage of these low rates for mortgage refinancing. You end up paying less money and pay off the student with a cash balance.