Currently, we have a 15-year mortgage. If we sold our house, we would get enough money to pay off our 64k in student loan debt. The downside is we would have enough to put 5% down on a new house but could only do a 30-year mortgage and would have to pay PMI. Would it be better to stay where we are and continue paying the student loan (essentially, we’re only paying 500.00 a month in interest) and have the house paid off in 12 years or pay off the student loans?
– Ryan in Ohio
Denny Ceizyk, LendingTree Mortgage Expert, responds…
Hi Ryan,
Great question. There are several factors to consider before we dive into the best game plan.
First of all, make sure you check on home prices in your area, so you have a sense of how much you’ll spend on a new home. Median existing home prices spiked 11.4% in August, compared with the same period last year, which could affect your budget for a new home, especially since you’ll be taking out a new 30-year mortgage. The long-term interest cost of financing a new home over 30 years may be higher than the $64,000 worth of student loan debt you have left.
1. Understand the cost of private mortgage insurance
Work on boosting your credit scores, especially if you need private mortgage insurance (PMI) to buy another home; the premiums can get pricey if your scores are lower than 680. Remember, PMI costs vary and they may reach 2.5% or more if you have a lower credit score due to the student debt you carry or other factors. If you’ve recently paid down your balances, make sure you give yourself a few billing cycles before you get a mortgage credit report. It can take up to 45 days before creditors report new information to the credit bureaus.
2. Assess your ability to maintain both payments
If you’re comfortable making the 15-year fixed payments along with your student loan payments, it may be worth staying put. You’ll have a home free and clear of any mortgages, versus one with only 5% equity and payments spread out for another 30 years.
3. Evaluate home equity borrowing options
Cash-out refinance
If you’re having difficulty making the mortgage and student loan payments, consider cash-out refinance options. Of course, consider the drawbacks, but one of the benefits is that you could choose a slightly longer term like 20 years and pay down and refinance your student loan balance so it’s more manageable. Fannie Mae offers a student loan solution program that may allow you to get a much lower rate for a student loan consolidation refinance than a normal cash-out refinance. Ask your lender if they offer it and get a loan estimate to see how it stacks up against other offers. Shop with at least three to five different lenders when you’re applying for a home loan.
You might be able to cut your monthly payments by just refinancing to a new 15-year fixed mortgage, especially with mortgage rates at historic lows (especially compared with where rates were three years ago when you took out your current mortgage). Some lenders might even offer a 12-year fixed mortgage so you don’t add additional years onto your new loan term.
HELOC
If you’re not sure about a cash-out refinance but want to tap some of your home’s equity, crunch the numbers on a home equity line of credit (HELOC). A HELOC is a revolving credit line secured by your home, and you make payments only on the amount you draw. One of the most important features is that the draw period lasts 10 years and you can make interest-only payments on the amount you use. If you have some smaller student loans at higher interest rates and payments, you could pay them off with the HELOC, then use the monthly savings to pay the HELOC balance off quicker. Look out for annual membership and maintenance fees. After the draw period ends, you may have to pay the balance off in one balloon payment. Another drawback: HELOC rates are usually variable, so your payment could go up and down over time.
Compare rates before you refinance.
4. Consider a blended strategy
It may be better to create a blended strategy. For example, you could use $32,000 from the sale of your home to pay off or refinance your student loans, and the other $32,000 to make a bigger down payment on a new house. You’d make a considerable dent in the student loan balances and leave more breathing room in your monthly payment for the new house. Even an extra 5% down can help reduce your monthly payment and monthly PMI premiums. Plus, you’ll have more equity when you close on your new home, which is a good thing if you need to suddenly sell your home in the future.
Keep in mind that any mortgage product that’s secured by your home, including the options listed above, put your home at risk of foreclosure if you fail to repay what you owe.
One final note
The benefits of having a mortgage-free home may outweigh the cost of carrying a student loan balance. Your home builds a foundation of wealth, and once it’s paid in full, you’ll probably be able to knock out those student loan balances in no time. You’ll also join the 38% of other Americans who are enjoying life without a mortgage.
