When you’re struggling to pay for college or eager to repay student loan debt, tapping into home equity may seem like a great option. But, there are pros and cons to consider that you need to understand before you move forward.
The following information can help you understand everything you need to know about how to use home equity to pay off student debt – and whether doing so is a smart idea.
How Can You Use Home Equity to Pay Off Student Debt or Pay for School?
Using home equity to pay off debt is a possibility if you have equity in your home. You have equity if your home is worth more than you owe on it. If you have a $200,000 home and owe $180,000 on it, you have $20,000 in equity.
You can tap into your home equity by:
Taking a cash-out refinance loan
A cash-out refinance involves taking out a new mortgage for more than you currently owe. You’d use the loan proceeds to first pay off your existing mortgage loan and then use the extra cash you took out to pay for school or pay off student loan debt.
Taking out a home equity loan
Home equity loans allow you to access equity without changing your current mortgage. You’d borrow a fixed amount of money and could use the loan proceeds to pay off your student debt or pay for school.
Taking out a home equity line of credit
Home equity lines of credit allow you to borrow up to a set amount of money, which is called your line of credit. You don’t have to borrow the whole amount at once, and as you pay back what you borrowed, you can borrow more. Again, you’d use the money available on your line of credit to cover school costs or repay existing student debt.
Typically, lenders won’t allow you to borrow up to the full value of your home. Many lenders would prefer you keep your combined total mortgage debt at 80 percent of what your home is worth. So, if you had a $200,000 home, the maximum total balance on your mortgage and home equity loan or line of credit would be $160,000.
However, some home equity lenders allow you to borrow as much as 85 percent of the value of your home. But, you’d usually pay a higher interest rate and need good credit to qualify for this type of loan.
Advantages of Using Home Equity to Pay for College or Pay Off Student Loans
Here are some definite advantages to taking out a home equity loan in order to pay for school or repay student loan debt:
You may be eligible for a lower interest rate
Home mortgages and home equity loans are secured debt, so you can usually qualify for a lower rate than on student loans.
You may be able to repay your loan over a longer time
Home equity loans and mortgage loans could have repayment terms that span as long as 30 years. Most private student loans need to be repaid in five to 15 years, although there are a few lenders that allow a longer repayment timeline. Being able to pay your loan off over a longer time can result in lower monthly payments.
You’ll have fewer payments to make if you can tap into enough equity in your home to repay and consolidate multiple existing student loans, you won’t have as many creditors to deal with or as many monthly payments to make. This can simplify your life significantly, and reduce the chances you’ll forget a payment.
SOURCE: Dave Rathmanner