How to Pay Off Student Loans with a Mortgage

Student loan debt continues to rise, so you’re not alone if you’re having difficulty repaying yours. Taking out a mortgage on your home is one option for repaying your student loans. If you already own a home and have equity in it, you may be able to use this option. However, you should exercise caution before taking out a home loan to pay off student loans. If you miss payments, the bank may foreclose on your home, and interest rates on your mortgage may be higher than those on your student loans.

Method 1: Calculating How Much You’ll Save

1. Determine the various types of mortgage loans available. A second mortgage (home equity loan), cash-out refinance loan, or home equity line of credit are all options (HELOC). Each of these loans has advantages and disadvantages that you should discuss with your lender. Before deciding on a loan, have your lender compare each option to the other two and get a second opinion.

2nd Mortgage: You borrow against your home’s equity and receive a lump sum. You’ll pay back the loan in instalments, just like you did your first mortgage. You can choose between a fixed-rate loan and a variable-rate loan, depending on what your bank offers and what works best for you.

A cash-out refinance loan refinances your entire loan, giving you access to your equity. This is sometimes at a lower interest rate than a second mortgage, but you may have higher taxes and spend more on the home overall, depending on your interest rates and how you pay back the loan.

Home Equity Line of Credit (HELOC): A HELOC allows you to borrow against the equity in your home in the same way that you would a credit card. You do not repay in instalments. Rather, like a credit card payment, the amount you pay each month varies depending on how much you’ve borrowed and what your interest rate is. A HELOC may begin with a lower interest rate, but it will eventually fluctuate and may rise over time.

2. Look for the best mortgage rates by shopping around. You will only save money if the interest rate on your mortgage is lower than the interest rate on your student loans. As a result, look into the current interest rates offered by lenders. Stop by local banks and let them know you’re looking for a second mortgage.

Online interest rates can be found. Website aggregators, such as LendingTree and Bankrate.com, allow you to compare multiple lenders at the same time. Remember that these are the best available rates, so they may not be the rate you receive based on your credit.

Consider fees and closing costs, which will raise the loan’s cost. If you can’t find the information you’re looking for online, contact the lender.

Second mortgages, cash-out refinances, and HELOCs all have different interest rates, so choose wisely. If you’re still undecided, gather rate information for both types of loans.

3. Calculate your student loan payments. Before you apply, you should figure out how much money you’ll save, if any. Calculate how much you will pay over the life of your student loans using an online calculator. Enter the total amount owed, the interest rate, and the number of remaining payments.

For example, suppose you owe $50,000 in student loans with a 6.8 percent interest rate. Over the course of ten years, you will pay approximately $69,000 in total, $19,000 of which is interest.

4. Calculate the costs of obtaining a mortgage. The interest rate is only one component of the total cost of your student loans. You should also consider the repayment period. Student loans are typically repaid over a ten-year period. Your mortgage, on the other hand, could last up to 30 years. To estimate the total cost of repaying student loans using the terms of a home mortgage, use a debt repayment calculator.

You might have $50,000 in loans, for example. Over the course of 30 years, your mortgage will have a 4% interest rate. You will pay approximately $85,000 in total, $35,000 of which is interest. This is significantly more expensive than simply paying off your student loans.

If you take out a 15-year mortgage at 4%, you will pay approximately $66,600 in total, $16,000 of which is interest. You can save around $3,000 by repaying your student loans with a mortgage.

5. Understand the risks associated with taking out a mortgage. If you take out a mortgage on your home, you risk losing it if you run into financial difficulties later on. This is due to the fact that your home serves as collateral for the loan. When you default, the lender has the right to seize the collateral—your home.

A student loan lender, on the other hand, can garnish your wages but not seize your home.

 By taking out a mortgage, you are putting your home at risk.

Consider your options carefully before taking out a mortgage to pay off your children’s student loans, as doing so could cost you your home.

Method 2: Obtaining a Mortgage

1. Determine the worth of your home. You can’t borrow more than your home is worth, so you’ll need to know how much it’s worth right now. Estimate the value using the methods listed below:

Find out how much comparable homes in your area have sold for. Look on real estate websites for properties that are similar to yours and in the same area. Ascertain that the homes are of comparable size, with the same number of bedrooms and bathrooms.

Contact a Realtor and request that they conduct a market analysis on your home and provide you with an estimate of its value.

Do not attempt to have your property appraised professionally on your own. Before approving the loan, your bank will require an appraisal, so having one done beforehand is a waste of money.

2. Determine how much you can borrow. Assume your home is worth $200,000 but you still owe $100,000 on your mortgage. You only have $100,000 in equity in this situation. Depending on your credit, lenders will typically allow you to borrow up to 95 percent of the value of your home. You can borrow up to $90,000 to repay student loans in this situation.

3. Check to see if you meet the loan requirements. In addition to having equity in your home, you’ll need to meet other criteria, just as you did when you first applied for a mortgage. Examine the following:

Credit rating. In general, good credit is required to obtain a second mortgage. Your lender will have a minimum credit score, and you will most likely qualify for a loan if your score is higher than the minimum and you have an acceptable debt-to-income ratio.

Earnings You must demonstrate your ability to repay the loan.

Debt-to-income ratio (DTI). Add up all of your monthly debt payments, including credit card debt, and compare them to your monthly income. For example, you may earn $4,000 per month but have $1,000 in debt payments each month. In this case, your percentage is 25%. To qualify for a loan, your ratio should be 45 percent or lower.

4. Fill out an application. If you’re willing to take the risks, contact a loan officer and request an application. Remember to provide all requested information and double-check it for accuracy. If you have any questions about the application, please contact the loan officer.

5. Repay your student loans. You must use the proceeds from the mortgage to pay off your student loans once you have obtained it. You may receive a check or a transfer into your account, depending on your lender. To obtain the payoff information for your student loans, contact the company that manages them.

Method 3: Lower Your Student Loan Payments

1. Determine how much you can afford each month. Make a budget that includes both fixed and discretionary expenses. Rent, car payments, and health insurance premiums are examples of fixed expenses. Determine how much money you have left over each month for student loan repayment.

The typical repayment period for student loans is ten years. You will pay the same amount every month for 120 months.

There are numerous ways to reduce your monthly payment, either temporarily or permanently. Reduce your discretionary spending as much as you can to give yourself more repayment options.

2. Consolidate your student loan payments. This is usually preferable to refinancing your mortgage to pay off your student loans. You may be able to consolidate all of your student loans into a single loan with a lower interest rate. Consolidating your debts makes repayment easier and may result in a lower monthly payment.

You can consolidate federal loans by applying for a Direct Consolidation Loan through the StudentLoans.gov website. However, the APR on this new loan will be the weighted average of the APRs on all of your current loans, so you will not save money.

Consolidate your debts with a private loan to save money. A private loan can be used to consolidate either federal or private student loans. In general, a credit score in the mid-600s is required. The interest rate ranges from 2% to 9%.

3. Make an effort to obtain income-based repayments. If your income is low, federal loans will allow you to pay a lower monthly payment. Inquire with your lender about any of the following:

Plan REPAYE Pay ten percent of your disposable income. Any borrower qualifies.

Pay as you go (PAYE) plan Pay 10% of your discretionary income and never more than the Standard Repayment Plan amount over a 10-year period. There are income requirements for this plan.

IBR Strategy. Pay 10% or 15% of your discretionary income, depending on when you took out the loans. Income eligibility is required for this plan.

ICR Strategy. Pay either 20% of your discretionary income or the amount you would pay over a 12-year fixed repayment plan. This is your only option if you have PLUS loans.

4. Extend your repayment period. By extending the repayment period for up to 25 years, you can reduce your monthly payment. You will end up paying more interest over the life of the loan, but you will not put your home at risk as you would if you paid off the loans with a mortgage.

To find out how much you’ll end up paying, use the Repayment Estimator.

5. Make an application for graduated payments. This option is available for federal loans. The specifics will vary depending on your circumstances, but you should expect to pay less in the first couple of years. In subsequent years, the amount grows. If you expect your income to rise in the future, a graduated payment plan is a good option.

A graduated repayment plan and an extended repayment plan can be combined.

6. Seek forbearance or postponement. By requesting a forbearance or deferment, you can temporarily reduce or eliminate your monthly payments. Interest on your loans continues to accrue while you are in forbearance. It does not, however, usually accrue with deferment.

7. Make contact with your private lender. Your repayment options for private loans are more limited than those for federal loans. Call the lender and inquire about the specifics of the offer. Don’t put it off.

In general, consolidating with a lower interest rate is your best option.

Some lenders, however, may offer short-term forbearance.

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