Are you contemplating consolidating and refinancing student loans into your mortgage as a homeowner? With the consistent increase in home values over the last five years, there’s potential to clear your student loan debts and retain home equity. Nonetheless, understanding the advantages and disadvantages of this approach is crucial to determining whether incorporating student loans into your mortgage aligns with your overall financial strategy.
If you are like many Americans, you may have thousands of dollars to pay back in student loans well into your thirties and even beyond. If so, you may be thinking of ways to reduce your monthly payments.
For those who are homeowners, one possible option is to roll your student loan into a refinanced mortgage loan. This concept is not for everyone, but it can make sense for some students who want to enjoy a lower interest rate and monthly payment.
How Refinancing Student Loans Works
The money from the new loan can be used to pay off student debt. This may be an attractive option if you have enough home equity. This will allow you to greatly reduce your payments in many cases. In 2024, we anticipate an increase in people taking out 2nd mortgages to consolidate debt.
Here are some advantages of doing this:
#1 Cut Down Number of Payments
For most people, the two largest bills every month are the mortgage and student loan payments. It is very important to stay on top of both of those loans and paying them on time. This can be difficult especially if you have to pay your student loans to several different lenders. If you use your mortgage to pay off your student loans, you will be able to reduce the number of bills you pay each one to one.
#2 Tax Deductions
Both your mortgage and loan interest payments are tax deductible. This means at tax time, you can reduce the amount of your taxable income by the amount of interest you have paid for your mortgage and student loans. For many Americans, the interest that you are paying on these two items can be $10,000 a year or more. That is a lot of interest that you can write off your taxable income. This can reduce your income taxes by thousands in some cases. Being able to reduce your taxes paid can be a very attractive reason to go ahead and do this. One of the biggest advantages of owning your own home rather than renting is that you can take advantage of many tax savings.
#3 Reduced Interest Rate
As of 2016, you can get a 15 year mortgage for 3.3% or so, and a student loan will have a interest rate in many cases of 4-5%. This means that if you refinance your student debt into your mortgage, you can save at least 1% in interest each year. You will be able to really save on your monthly payment. And when you can afford it, you can even start to pay faster on your mortgage and pay off your mortgage faster. To take advantage of this savings, you will need to have good credit so that you qualify for the lowest interest rates. So, if you want to do this, you will need to be sure that you do all you can to improve your credit score before you attempt to do a refinance. If you are looking to consolidate student loans into a mortgage, we suggest speaking with a reputable lender or bank that can educate you on the pros and cons of such a transaction.
Considerations (The Opponents to Using a Mortgage to Consolidate Student Debt)
There also some things that you should think about on the down side if you decide to go ahead and refinance your student debt into a mortgage:
#1 Secured by Your Home
Any time you take out a loan that is secured by a property, you are going to get a lower interest rate than an unsecured loan. That’s good. The problem is if you are no longer able to pay the loan. At that point, the mortgage lender can legally seize the home. Therefore, by wrapping your student loan debt into your mortgage, you are taking a risk if you are no longer able to pay your student loan. You could lose your home. Is it worth it? Well, it varies by the situation. If you are able to save a great deal each month by refinancing your student debt into your mortgage, it may make sense. Consolidating student loans into a mortgage is not for everyone. Just be aware of the risks if you cannot pay the loan anymore.
#2 No Flexibility
One of the advantages of holding a student loan debt is if you cannot pay the loan. There are options for many student loans if money is tight. You can request a loan deferment for at least a few months in many cases. For students who are still in college, you usually qualify for a deferment right away. However, if you lose your job, you may be able to qualify for a deferment as well. If you have the debt as part of your mortgage, you always have to pay the mortgage. It is rare that you could stop paying on the mortgage and not lose the home. Learn more about debt consolidation loans.
#3 Longer Term Can Add Costs
If you refinance student loans into a mortgage, you may extend the time that you are repaying the loan by 10 years or more. Sure, this lowers your payment, but you are going to pay more interest and more money in the long run than if you just paid it off in fewer years. Some people could end up still paying on student loan debt when they should be retiring, so this is a danger that you have to consider.
#4 Closing Costs
Doing any new home loan involves closing costs. You can expect to pay a few thousand dollars to close on any new mortgage loan, so you need to figure this into the equation as you are looking at a new mortgage loan.
Summary on Refinancing Student Loans and Debt
Whether you should refinance your student debt into your mortgage will depend upon many factors. It can be a good idea if you are having trouble paying off your student loan debt due to a high interest rate. It may not be worth it if the savings are only going to be minimal each month, however. It might be a good idea to talk to your financial adviser to see if this makes sense for you.