Cash out Refinance to Pay off Student Debt

[GopherStache]

Hello everyone,

My wife and i were hoping to ask the community to see if we are on the right path with a cash out refinance. So essentially we want to do a cash out refinance with our home equity to pay off as much of our student loan debt (which is at a higher interest rate) as possible.

Home Value ~ $450,000
Mortgage Left on Home ~ $170,000
Student Loan Debt ~ $330,000

This student loan debt is new and has not been consolidated/refinanced through a private lender yet because the gov is still offering 0% interest rate on these loans until October. The interest on these averages to about 5.4%, and if we refinanced with Credible or Earnest we could get ~ 4% on a 10 year term.

We were hoping we could get maybe a 3.5% - 4% interest rate on a 30 year term if we did a cash out refinance, then planned to hold this money in a savings account until October, then all at once, attack our student loan debt come October.

We have so many questions so any advice would be greatly appreciated! :

Is anyone familiar with Student Loan cash out refi vs. a normal cash out refi? It sounds like you could get a cheaper interest rate on the cash out money if it is directly paid to the private lender (credible, sofi, earnest, etc.) but we weren't sure of all of the consequences if we refinanced through a private lender first. We are concerned about the mortgage interest rates changing for the worse before October. Does anyone have experience with this?

Our mortgage is currently with Wells Fargo, does anyone have any advice on doing the cash out refi with them vs another banker? Due to these forums we plan on opening a Charles Schwab Checking and an Ally Savings account, but we weren't sure the best mortgage lender in the market currently. With this, should we be worried about opening up new joint bank accounts (checkings and savings) in terms of lowering credit score before asking for a cash out refinance?

Since our Cash out Refi money isn't enough to cover the entire amount of our student loan debt, would it be better to refinance with a private lender before we pay down our debt with the refi money, or after?

I don't want to continue flooding this post with questions but any conversation around this would be greatly appreciated, thank you so much all!




 

[Sibley]

First, I would check to see if you quality for forgiveness based on the thing Biden just did. (I don't know details.)
Second, what's your income? Separately, what's your expenses? If you make $10k net a month that's an awfully big shovel, and if your expenses are low you can throw a lot of money at the student loans.
Third, right now you're not accruing interest. It's in your benefit to pay off whatever you can now without interest. 0% interest is better than 3% is better than 5%.
Have you looked into federal student loan consolidations at all? May or may not make sense, but you should know what options you have.

Mortgage interest is deductible if you itemize. It's "below the line" of AGI. Student loan interest is deductible as an adjustment to income - "above the line". It is generally more valuable to reduce AGI if you have the option.

[GopherStache]

Hello and thank you for the reply,,

My wife and I make ~$190k combined before taxes and our annual expenses are about ~45k combined.

We have looked into the loan forgiveness programs and are not convinced. We know many people that had issues along their 10+ year journey of ensuring their loans do get forgiven in the end.

We are pretty certain we want to cash out refi, but are just looking for advice along the lines of the best way to go about this process.

Thanks again

[Sibley]

190 - 45 - taxes = A LOT OF SHOVEL. My very rough, inaccurate math suggests somewhere around $100k of shovel. You have $300k of loans, assuming my math is terrible you can have that paid off in 5 years. Probably less.

You do not need to cash out refi. You need to buckle down and direct that firehose of cash at your student loans. Seriously. Start directing excess cash at your loans. Every penny you can throw at them now with no interest will reduce the balance. Then, after the interest starts coming due, look into consolidation. You can post the breakdown of your loans and get suggestions as to the best way to get the lowest interest rates at that time. That will help you minimize the amount of interest you're paying, which will help you continue to pay off the loans.

By doing a cash out refi, you don't pay off all the loans, you don't decrease your overall debt, you don't really help your tax situation. All it does it make you feel like you did something, when really all you do is move debt around. It's useless. Don't do it.

Do make sure you've got an emergency fund, make sure you're saving for retirement, and then direct the rest of extra cash to the student loans.

Note: I'm biased towards paying of SL debt. There can be situations where it doesn't make sense to pay it off, but at $300k in debt, you really need to get that balance down. What happens if you or your wife decide to change careers and suddenly you're making a fraction of your current income? You'd be screwed.

[ender]

I'd guess you can refinance for pretty much free away from Wells Fargo too, especially if you originated the mortgage with them.

When I shopped for a house (also in the Minneapolis area) a year ago they were the least competitive mortgage originator of all the ones I looked at - and I got detailed quotes from 6+ mortgage originators.

Our cost to refinance last year was $2300 effectively so even dropping our rate a relatively small amount gave us a 2 year payback period on our refi.

I personally disagree with @Sibley slightly. Your income of 190k puts you far above the phase out on deducting student loan interest and so it's possible, depending on what the rest of your situation looks like, that you could reduce the effective rate pretty meaningfully simply by refinancing if you are currently able to fully itemize that interest on your mortgage.

That being said, I'd only consider that if you have a serious plan to use the big shovel to plow through those loans.

[Fishindude]

My personal opinion.   I would not use the house equity trading one debt for another.
Just get aggressive living cheap and pay those loans off as rapidly as possible.   Pick up second jobs if you need to.
You make a lot of money.   With some personal sacrifice, you should be able to dig out in a few years.

If you really want to get serious, sell the house and vehicle(s), get into cheap housing and car(s), cut all spending to the bone, etc.

[Laura33]

Question:  why do you have so much equity in your home?  Have you been prepaying the mortgage, did you put down a giant downpayment, or did you just luck into a hot real estate market?  If it is because you have been prepaying the mortgage, stop that right now.  You need to get rid of the higher-interest SL debt and get your investments on track before you should even be thinking about prepaying. 

This is one of the few times I would recommend doing a cash-out refinance to pay down other debt, and it is for one reason only:  SLs are not dischargable in bankruptcy.  With a home, your worst-case scenario is you lose the house via short-sale or foreclosure; it sucks, but you have the opportunity to start again.  With SLs, if the shit hits the fan, you can lose everything and still have a giant albatross of 6-figure debt hanging over your head, continuing to grow with interest and penalties. 

But I very much advise doing so as part of a larger plan to get your financial ducks in a row.  Even if you do the cash-out refinance, that is only going to get you about half the way there, and you will still have six figures in SL debt out there.  And that, my friend, is a hair-on-fire debt emergency.  So you need to be using that big-ass shovel of yours to dig yourself out of that debt ASAP.  That includes:

1.  Find the best cash-out refi you can.  Probably not going to be Wells Fargo, FWIW -- IMO they generally suck eggs.

2.  Once you do that, set aside a few thousand bucks for an emergency fund if you don't already have one.  Enough to get you through a month or two at a bare-bones level.

3.  Throw every remaining cent at the SLs, before the 0% period expires.

4.  Start researching options to refinance or consolidate those SLs.  Note that at your income level, it is very unlikely you will be eligible for any sort of forgiveness coming out of the current political situation, so start from the assumption that you're going to need to get these suckers paid off on your own, and figure out the cheapest, lowest-interest way possible to do so.

5.  Once you have the SLs set on whatever your plan is, throw every remaining cent at them.  That means looking hard at your budget -- at what you consider necessities that are really just luxuries that you think you "deserve" because you work so hard for them.*  The reality is that Past You spent a lot of $$ that he didn't have, and Current You is left holding the bag.  The very, very good news is that Past You spent that money to give Current You that giant-ass shovel that you now hold.  But that still means Current You is responsible for deploying that shovel as effectively as possible, so that Future You won't still be digging out a decade from now.

On that last bit, I'd suggest doing a full case study to evaluate your spending.  There are a lot of people here with a lot of experience who can help you identify your blind spots and suggest ways to save money on various parts of your budget. 

And good luck!


*I don't know you at all, so this is not a personal slam in any way; it just reflects the reality that the vast majority of us live in and the kind of thinking that leads us to justify spending on ShinyPrettyNow things instead of using that money for the more boring stuff that has only long-term benefits. 

[Sibley]

I'd guess you can refinance for pretty much free away from Wells Fargo too, especially if you originated the mortgage with them.

When I shopped for a house (also in the Minneapolis area) a year ago they were the least competitive mortgage originator of all the ones I looked at - and I got detailed quotes from 6+ mortgage originators.

Our cost to refinance last year was $2300 effectively so even dropping our rate a relatively small amount gave us a 2 year payback period on our refi.

I personally disagree with @Sibley slightly. Your income of 190k puts you far above the phase out on deducting student loan interest and so it's possible, depending on what the rest of your situation looks like, that you could reduce the effective rate pretty meaningfully simply by refinancing if you are currently able to fully itemize that interest on your mortgage.

That being said, I'd only consider that if you have a serious plan to use the big shovel to plow through those loans.

OK, Ender did better math than me. I could go with Laura's approach. However, there's also all the people who argue to not pay off your mortgage. If you're not doing cash out refi's I'm ok with that, but otherwise you get into the problem of repeated refis and you never build significant equity. Then, when 2008 happens you lose the house. Pros and cons, but still pay off the debt.

[Laura33]

However, there's also all the people who argue to not pay off your mortgage. If you're not doing cash out refi's I'm ok with that, but otherwise you get into the problem of repeated refis and you never build significant equity. Then, when 2008 happens you lose the house. Pros and cons, but still pay off the debt.

I agree 100%.  That's why I don't like using debt to pay off debt; it makes you "feel" like you're doing something and removes some of the urgency that having that huge debt brings, but without actually incorporating the kinds of changes to lifestyle and mindset that prevent you from falling back into the same cycle.  In case I wasn't clear above, I would recommend the refinance here only if doing so is part of a larger plan -- not intention, plan -- to get the SL debts paid off ASAP and to then start investing the extra. 

[Peachtea]

I would not do a cash out refi to pay off student loans! One thing nobody has discussed so far is that you are talking about taking individual debts and combining them into one marital debt. You don’t say who has what in student loans, but it would be very rare for a federal loans to be co-signed by a spouse. By doing a cash out refi, assuming both your names are on the mortgage, you would be jointly liable for that loan. Right now you’re each only liable for your own student loans. Any student loans taken out pre-marriage are not the other spouse’s problem on divorce (and usually the same is true even for federal loans taken out while married). And federal loans are discharged upon death of the student - without taking anything from the student’s estate. That means if things go south, whether due to death or divorce, you would only be responsible for your student loans vs being liable for both of yours with the refi.

It’s particularly unfair to combine student loan debt if one spouse has a disproportionate share of the loans, and even more so if the spouse with less loans has a lower income. But even if your amount of debt and incomes are roughly even, no freaking way would I sign up to double my debt! Don’t get me wrong, I’m all for attacking student loans as a team regardless of who’s they are. My spouse and I have completely combined our finances and my federal student loans are paid from those joint accounts. And a lot of our joint income got shoveled at my private student loans earlier in our marriage. Deciding to pool your income and tackle loan repayments together is a lot different than deciding to be forevermore, even beyond death do us part, jointly responsible for each other’s debt.

If you take the advice to buckle down and throw everything you got at the loans, you’re not even saving that much money on a 5.4% vs 4% loan. With the income and expenses you listed, you could easily throw 85k (if not more) a year at them and be done in less than 4 years. That means you would save a whopping ~7k on interest while paying off 330k over 4 years. Is that worth the added liability and risk you’re each taking on with a cash out refi? For me, that’s a big nope. If you’re dead set on refinancing, at least try to get a better rate than 4% with a private student loan company like earnest or SoFi etc. In that case, I still recommend looking very carefully at what rights you are giving up by switching from federal loan to private one, and whether the lower interest rate is worth it.

Personally, I think, for most people, the ability to declare bankruptcy is less valuable than the protections and flexibility that comes with federal loans. At least for most of the SHTF situations I can think of, I’d rather have a federal student loan than a giant mortgage that might cause me to lose my house should SHTF. One spouse unexpectedly dies? Federal loans wins - debt is discharged (without losing anything from the estate). One spouse becomes permanently disabled? Federal loans wins - debt is discharged. Long term job loss? IMO, federal loans win - I’d rather go 2 years on an income based repayment plan, which will be $0 if my income is low enough, than risk ruining my credit for 7+ years and losing my house in bankruptcy. It’s a different calculation if you’re comparing private student loans to a cash out refi. But you’ve only indicated that you have federal student loans.

[MrThatsDifferent]

My 2 cents: follow the advice to firehose the debt, but consider doubling the time and contributing money to your investments. So, say $50k to investments and $50k to SLD. That way you’re getting the best of everything, killing the debt and growing your money. I wouldn’t refi and I would make minimum payments to the mortgage.

[Kayad]

Two more thoughts:

First, it sounds like one or both of you just finished some sort of professional school and maybe just entered the workforce.  In that scenario (or something close to it), take extra care not to overcommit to a plan that banks on a career path that you have only just started down.  I.e., be really sure there is no prospect for a job that qualifies you for federal loan forgiveness.  More generally, think through the contingency of what a job change/job loss would do to whatever route you go down (i.e., federal loans have forbearance, mortgage/private likely do not).  It is a debt emergency, but you still need to scenario plan for the next 10 years.

Second, worth it to really shop the market thoroughly with that much debt.  Sounds like you've done some recon, but a few thoughts: If you live in the right place (east coast or CA, and a few other places), First Republic seems like a great option for student loan refi.  This guy: https://www.studentloanplanner.com/refinance-student-loans/ has been a helpful reference to me.  I'd consider refinancing at least a part of your debt into a variable rate if it is significantly better; it's worked out great for us.  Overall, if it was me, I'd want to tackle that debt much sooner than 30 years, but if the cash out refi rate is considerably better, maybe that is worth it.

Good luck!