My current mortgage is at 4.125%, and I have the ability to refinance to 3.875%.
Not a huge difference, but I have 60% equity in my house, I would use about 2/3 of that equity, just enough to pay off every last bit of debt I have (mostly student loans which I’m paying 6.8%)
I’m adding zero debt to my credit score, and actually my monthly payments will go down by $200/month.
Has anyone done this before? Is it a huge hassle?
Are you looking to do a cash-out refi or a home equity loan/line of credit?
Think it would be a cash out. When the bank pulled
My credit they asked if I wanted to use money to pay my student loans, so I assumed they would just send the check to DoE
I’m doing this right now. Not to pay debts, but to invest in stocks and bonds. If I had a guaranteed return like yours, it’d be a no-brainer. Why are you even hesitating?
I would suggest only taking the equity you need to pay off your higher interest debt. Use the rest to either get a shorter term mortgage (say, 20 years vs. 30 years) or to reduce your monthly payment more than the $200.
Then again, i’m debt adverse.
Invest the $200 a month that has a greater average ROI than 3.875% after taxes, and it will probably work out well in the long run. If you can’t find something like that, just keep your mortgage payment at the same amount that it is now, and write a letter to your mortgage company telling them to apply the extra amount to the principal.
Regards,
Shodan
Math wise, this is the right decision. You’re replacing a debt at a higher interest rate (the student loan debt) with one with a lower interest rate (the mortgage)
However there is another wrinkle. What happens if you are unable to pay your mortgage, vs what happens if you are unable to pay your student loans.
In the former case, you get foreclosed on, eventually, and lose the house. (if you have even a little income this is not catastrophic)
In the student loan case, you enter a program that factors in income to decide your monthly payments. (if you aren’t in that program already)
However, in the case of a mortgage debt, if you end up underwater on the house and walk, generally speaking that’s it, the bank is not going to be able to collect on the difference you owe them. They can try but there are many barriers.
While of course, this is not true for student loan debts, only death gets you out of them. But it doesn’t get your estate out of a mortgage debt.
Anyways it’s a surprisingly complex decision. One other thing of note - there is something to be said for investing the value of the house in the stock market…at the right time. Not now, when the market is at a high and appears to be slowing to reach it’s final peak (if it hasn’t passed it) until the next recession. But the advantage of buying stocks (or bonds) is it’s a diversification. Owning a mortgage, you have simply invested all the money into the value of a single house in a single place. Far more probable for the investment to go bad or go sideways if it’s just 1 investment.
If the interest rate on what you’re paying off is high enough to make this worth it AND you’re confident you’ll be able to pay off the new mortgage then it’s probably worth it. However, keep in mind that you’re securing unsecured debts.
Look at it this way, if you don’t pay down credit cards (or a student loan) what’s going to happen. They’ll put you in collections? They’ll ruin your credit score? You won’t be able to get credit with them again? But when you take all the debt and roll it into your house, now you can potentially lose your house if you don’t keep up with the payments.
While it can mean paying less money overall it does it at the expense of increasing risk in other places.
Regarding the re-fi you need to look carefully at how much the 1/4 of a percent drop in rate is going to save you over the life of a loan. It really depends on what you have outstanding $ wise and what kind of term you’re looking at.
The closing costs involved in the re-fi may be more than the savings.
Do it for the student debt for sure.
That is (hopefully) not a debt you are going to fall into again.
Anything else is based on your personal responsibility. Someone who has racked up a of credit card debt is likely to just do it all over. (Even if it’s stuff like medical expenses. All too often people who get into that end up getting more later on.)
I know people who did this just before the great recession and were bragging about it. For a short time, anyway.
This seems quite bold. My son just came into $5k and is wanting to experiment with investing. Market & world politics in general feel pretty dicey right now and it just seems like [del]shit’s about to crash[/del] stocks are about to go on sale big time. That means assume a cash position and watch the sucker bottom out with a smile on your face instead of a frown. I’m explaining that to him and we’ll set up an ersatz “what if” account in Quicken. We’ll stay on the cash ferreals and pretend we sank the money into some stock or mutual fund and watch how it would’ve performed (like we did with muthafukkin AMZN with my mother in law’s estate in 1998–just watched all that fantasy money NOT roll in when it went from $2 to close to $100). If nothing else the lesson that will be learned is, “Man, you just never really know what’s gonna happen.”
But back to the OP:
For things like this it’s possible to paralyze yourself if you borrow enough trouble. Just to move forward you have to assume nothing bad is going to happen at work, the local housing market isn’t going to tank, and that you’re not going to have to sell under duress due to some unforeseen event. After all, the lender is only looking at “What Is” and not “What Ifs”, and they do this for a living. If they ain’t worried, then I ain’t worried. But then you have to be clear about what your goals are because the loan isn’t usually free. Will you save money in the long run? Or are you more interested in improving cash flow today even if it means more expense in the long run.
Refinancing a home is pretty easy. We’ve done it several times as interest rates have fallen. Be sure to shop banks, as some offer better deals than others and make sure your equity doesn’t fall below the point where you’d need PMI.
IIRC, we had to provide a few recent check stubs, the prior 2 years tax forms including W-2s, and proof of insurance.
Our biggest obstacle in recent years is getting the bank to appraise our house somewhere near what our county auditor deems our house is worth for tax purposes. Last refi there was a $75,000 gap. Lazy appraisers sometimes don’t even visit your house but instead rely on comps in the neighborhood to determine fmv.
Once you get approved, a lot of paperwork can be done online ahead of the closing using electronic signatures, which greatly reduces the hand cramp you used to get from signing all the papers. However, I’ve never avoided having to take a few hours off to close on the loan.
Consolidating at the time of mortgage renewal is (at least IMHO) a great way to save some cash in interest payments as long as you use the freed up cash wisely and not start another spending spree running up the extra debt again. (I hope my older son visits this site and reads this):dubious:
If I may piggyback onto this thread…
My wife and I bought our first home almost three years ago. I’ve been putting a couple hundred extra towards the principal each month. I think we’re on track to hit 20% equity in another three years or so, allowing us to ditch the PMI.
Is there some magic percentage of equity we should hit before thinking about refinancing and paying off student loans?
Nobody has brought up the time horizon? If you re-fi, don’t you reset your clock? If you were 12 years away from paying off the original loan, and you re-fi, now you are 20? 30? years away from paying off. The extra $200 a month may seem good now, but what about the extra $xxx you would be getting after 12 years once you paid off the original? Maybe I’m way off base, and it might still be the right decision to re-fi, but I think this is worth tossing into the mix.
I think it is probably a good idea. Do a cash flow calculation - you should be keeping more of your income every month when you do this, since the interest rates you’ll be paying on the same amount of debt will go down.
The increased risk only comes from the increased mortgage payments. If things are bad enough that you could lose your house, you might lose it even if you had more equity in it.
Downside: if someone decides to excuse student debt, you’ll have lost out.
We did it to pay off our daughter’s debt, but that was very small and we still had tons of equity when we were done. Think about the tax implications also. We paid off the mortgage when we lost the tax break. It might affect your decision.
Something to consider: let’s say you’re going with a 30 year loan. You’re now amortizing that student loan over 30 years instead of the 10 (or whatever) you’re currently scheduled for. How much total would you pay on that money over the 30 years? You might see an immediate cash flow improvement at the cost of spending more overall.
Could you refinance your current mortgage, saving some amount of money per month, and use that difference to reduce the student loan? Or refinance the current mortgage, and take out a secondary line of credit on the house to pay off the student loan?
Bottom line, don’t look just at the immediate cash flow change, but the long-term net cash flow. Now, if you could continue paying the $200 higher figure (at least for as long as the student loan would have lasted), you could come out way ahead.
If it were any kind of loan other than a student loan (which you cannot get out of with bankruptcy) I’d say do NOT do what you describe, as you’d be turning unsecured debt into debt secured with your house. Unsecured debt can be discharged in bankruptcy. Secured debt cannot.
You’ve kind of answered your own question there.
If you would be above 80% loan to value, don’t do it. You’d wind up right back in PMI-land. The PMI would likely negate any savings realized by rolling in the student loans.