Home Equity & Paying Off Student Loans*

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There are many ways to satisfy student loan debt. Typically, it’s through 10 years of month-to-month-to-month payments.

The current marketplace, however, provides other options. Those options include a line of credit, a variety of cash-out programs, and home equity loans.

Taking advantage of the marketplace, a new Fannie Mae program encourages homeowners to refinance their homes, to pull out their home equity as cash, and to use the cash to pay off the student loans. Doing so arguably leaves homeowners with a larger mortgage at a potentially lower interest rate.

Those with a lot of home equity can often get mortgage rates that are substantially lower that the rate on their student loans. In fact, even though refinancing rates have edged up in recent months, they remain historically low. Especially when compared to current student loan rates.

Rates for Parent PLUS loans are at a relatively low level – 6.31%. Additionally, private lenders are offering student loans at rates ranging from 3.9% – 12.8% based on borrower’s credit and whether there is a co-signer.

Combining a low interest rate with a higher mortgage interest deduction AND having the student loan debt paid off…

If you have the home equity available, it SOUNDS like a great idea!

Yes, it certainly sounds great. But, is it really a smart use of your home equity?

If you have a decent amount of home equity built up as your child graduates from college, it’s also likely you had a decent amount of equity built up when and/or before your child began his/her undergraduate education.

Why would you let the equity sit there unused, subject to market forces, rather than use it to your benefit? Why wouldn’t you pull the equity earlier, then place it where it would safely and securely grow from 5%-11% on an annual basis, depending on the market (not an investment vehicle; but, rather, a savings vehicle)?

If a parent in this situation had made their home equity work for them, it’s entirely possible the funds would be available to pay off most and, perhaps, all of the Parent PLUS loans when the loans became due.

If you’re interested in learning how to make the equity in your home work for you during your college planning campaign, contact our Professional College Planners to schedule your first college funding meeting.

* Adapted from an April 27, 2017 Washington Post article by Danielle Douglas-Gabriel

 

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