Did you buy your home at a fantastic deal during the recession? Has it climbed in value since?
If so, you most likely have a good deal of equity in your home. This presents an opportunity: you can “cash out” by refinancing your mortgage or opening a home equity loan at low interest rate.
So should you tap into that equity to repay your pesky student loan debt?
Put bluntly, no.
The Problems of Using Home Equity to Pay Off Debt From College
Student loans and home equity do not mix. Let me repeat: using a home equity loan to pay off student debt is a terrible idea that could be detrimental to your finances and your family. As attractive as it seems on the surface, don’t put your financial security and your home on the line to pay off student loans. The financial risk isn’t worth it.
I know you’re probably thinking, “But why not? I could pay off all of my student loan debt and be free and clear. I’m already paying my mortgage anyway.” Let’s explore all the reasons why this is a bad idea:
You’re not actually paying off your loans.
You won’t actually pay off anything, you’re simply reshuffling your debt — your student loan debt will have essentially moved from one account to another. It’s not paid off, you still have the debt, and it’s now just under a new name. Instead of “student loan debt” it would now be “home equity loan debt.”
This new debt might have a lower interest rate (or not), depending on your student loan interest rates. But it also carries additional risks. And that leads to my next point…
You’re putting your home at risk.
Taking out that balance against your home’s value could put your family in jeopardy if financial emergencies arise. What will happen if you suddenly find yourself laid off from your job or facing enormous medical bills? What happens if you can no longer afford your equity loan payments?
If you turn your student loan debt into equity loan debt, and you aren’t able to make loan payments, you may lose your home to foreclosure..
In the best-case scenario, you’ll be able to “short sale” your home, which means you’ll fire-sale it for less than the amount you owe your lender. Even in this best-case scenario, but you’ll still lose your home.
Student loans are unsecured debts, meaning that they’re not guaranteed by any physical collateral like a car or house. If you default on your student loans, there’s a risk that your wages may be garnished or you’ll never see a tax refund. But your lender won’t go after your home.
If you transfer an unsecured debt (student loans) to a secured debt (a refinanced mortgage or home equity loan), your house is suddenly up-for-grabs.
You could end up with a higher interest rate than you started.
If you don’t fully understand the terms and conditions behind your home equity loan, you may unknowingly be shifting your debt into an account that could have an even higher interest rate than your student loan debt after the introductory period has ended.
Not all home equity loans have fixed interest rates and you could be setting yourself up for interest rate whiplash if you don’t pay attention to the fine print.
You won’t be eligible for student loan forgiveness programs.
If you make your student loan payments consistently, you may be eligible for a student loan debt forgiveness or cancellation program. Transforming your student debt into a home equity loan will immediately disqualify you for any sort of federal program to help pay it off. If you want to keep your options open for debt forgiveness or cancellation programs, never transfer your loans to a private loan, consolidate them with other debt, or trade it for a home-equity loan.
Expert Advice On Using Home Equity to Pay Off Student Loans
Financial guru Dave Ramsey considers home equity loans to be a con. In an interview with Bankrate, he stated paying off any other loan by transferring into a home equity loan is one of the biggest financial mistakes that people make.
Your home and your equity are your biggest financial assets, he explained. If you tap into that equity to pay off debt of any kind — whether its student loan debt, credit cards, or for debt consolidation — you’re essentially turning your biggest financial asset into your biggest liability.
What should you do?
If you shouldn’t take out a home equity loan, than what should you do to pay down your student debt? Here are a few tips:
1. Trim your expenses. Cut your spending as much as possible, rebuild your budget with the new numbers, and apply your savings to your highest interest-bearing student loan amount. Once that loan is paid off, continue paying that same amount towards the next balance, and so forth, until your loans are gone for good.
2. Start a side gig. Try working a part-time job from home or on the weekends by developing a “side hustle,” and use this extra income to more aggressively repay your student debts.
3. Create a plan. Develop a solid roadmap that will allow you to abolish your student loans for good – rather than just transferring them into a new name.
Don’t put your home on the line to just reshuffle your debt. It’s not worth it.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|