Refinance my mortgage to pay off student loans? Yes or No?

[Nick_Miller]

The numbers:

Current Mortgage is a 15-year mortgage with about 10.5 years left, at 3.75%. House is worth about $135K and mortgage balance is about $68,000, but we could only cash about about $40,000 in equity if we refinanced and kept 20% in equity in the home to avoid PMI. Based on my research, I think we could refinance to a new 15-year at 2.75%, so saving a full percentage point.

Student loan balance is about $69,000 at 4.50%, so cashing out would knock it down to $29,000.00. I would hope we could knock that out in 18 months.

Alternatively, we could wait another six months, and between higher equity and lower student loan balance, we could probably knock the student loans down to under $23,000 with this move.

Pros and cons? I know a mortgage is a secured debt, but it's not like the student loans are  just going to disappear, so does it really make much of a difference? If I defaulted on my student loans, my wages would be garnished, and we'd likely have to sell our home anyway.

Almost a 2 point difference between the current student loan rate and what we could probably get on a refi. Plus, all of our interest on the mortgage payments would be deductible, while student loan interest deduction is capped at $2500 and it phases out at higher income levels.

Any feedback on this?

[dandarc]

I believe the math would say do it to lower the interest rate, then take as long as you can to pay off the mortgage and remaining student loan debt.  4.5% is still pretty low - possibly lower than that due to the tax treatment.

[Bracken_Joy]

Personally, I wouldn't aggressively pay off 4.5%. It's in the "grey" area of interest rate, but I think you'd ultimately beat inflation and get better returns if you invest instead.

So I *would* refinance your mortgage just to get a better rate if you can. You could also look into refinancing your student loans next, through a company like SoFi. I haven't used them, but lots of people on the forums have had good experiences.

Then pay minimums and throw all the extra at investments instead. Be sure to max all tax advantaged space available.

The useful guide I've seen around thanks to MDM:

WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Roth or Traditional IRA based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: trad if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between
5. See #4 for choice of traditional or Roth for 401k
6. Applicability depends on the rules for the specific 401k
7. Again, take the risk-free return if high enough
8. Because earnings, even if taxed, are beneficial

[Bracken_Joy]

And 10-yr treasury is currently 1.58%, so #2 is 6.58% and #7 is 4.58%

[Nick_Miller]

My student loans have already been consolidated a number of years ago. 4.5% was pretty good at the time, but now I feel it's too high. Would a company like SoFi refinance for a lower rate?

[Bracken_Joy]

My student loans have already been consolidated a number of years ago. 4.5% was pretty good at the time, but now I feel it's too high. Would a company like SoFi refinance for a lower rate?

My understanding is there isn't a limit to possible numbers of ReFi's as a standing rule, just whether the company is willing to. I've heard that SoFi has pretty high credit standards, so it is hard to qualify.

I wouldn't do the two ReFi's at the same time- all the hard pulls will affect your score and could endanger the contracts. So pick one, apply, wait a couple months before applying to the other.

[Nick_Miller]

My student loans have already been consolidated a number of years ago. 4.5% was pretty good at the time, but now I feel it's too high. Would a company like SoFi refinance for a lower rate?

My understanding is there isn't a limit to possible numbers of ReFi's as a standing rule, just whether the company is willing to. I've heard that SoFi has pretty high credit standards, so it is hard to qualify.

I wouldn't do the two ReFi's at the same time- all the hard pulls will affect your score and could endanger the contracts. So pick one, apply, wait a couple months before applying to the other.

It's tough to pick because I would be aiming to save a percentage point on each, and the balances are almost exactly the same. Our bank is more of a "sure thing" though. I'm pretty sure we'd qualify for the 2.75% rate.

[Bracken_Joy]

My student loans have already been consolidated a number of years ago. 4.5% was pretty good at the time, but now I feel it's too high. Would a company like SoFi refinance for a lower rate?

My understanding is there isn't a limit to possible numbers of ReFi's as a standing rule, just whether the company is willing to. I've heard that SoFi has pretty high credit standards, so it is hard to qualify.

I wouldn't do the two ReFi's at the same time- all the hard pulls will affect your score and could endanger the contracts. So pick one, apply, wait a couple months before applying to the other.

It's tough to pick because I would be aiming to save a percentage point on each, and the balances are almost exactly the same. Our bank is more of a "sure thing" though. I'm pretty sure we'd qualify for the 2.75% rate.

You're talking essentially the same totals too: $68k vs $69k in your original post. Personally, I would try the SLs first since they are a higher rate, and that whole compounding interest thing, but I suppose it depends what you think mortgage rates will do and how long they'll stay low.

I could well see an argument for either one first. I think the most important thing, though, is to *not* plan on paying aggressively and instead put money toward investing- the math says that's the best option.

[Nick_Miller]

My student loans have already been consolidated a number of years ago. 4.5% was pretty good at the time, but now I feel it's too high. Would a company like SoFi refinance for a lower rate?

My understanding is there isn't a limit to possible numbers of ReFi's as a standing rule, just whether the company is willing to. I've heard that SoFi has pretty high credit standards, so it is hard to qualify.

I wouldn't do the two ReFi's at the same time- all the hard pulls will affect your score and could endanger the contracts. So pick one, apply, wait a couple months before applying to the other.

It's tough to pick because I would be aiming to save a percentage point on each, and the balances are almost exactly the same. Our bank is more of a "sure thing" though. I'm pretty sure we'd qualify for the 2.75% rate.

You're talking essentially the same totals too: $68k vs $69k in your original post. Personally, I would try the SLs first since they are a higher rate, and that whole compounding interest thing, but I suppose it depends what you think mortgage rates will do and how long they'll stay low.

I could well see an argument for either one first. I think the most important thing, though, is to *not* plan on paying aggressively and instead put money toward investing- the math says that's the best option.

I know, but we're both pretty conservative, especially my wife. She would be okay with us shifting our debt around to get a lower rate, but I don't think she'd be on board "going backward" on debt just to get a lower rate and to free up extra money each month to invest. Basically, she would not want to "cash out" on a refi if the cash out was going to investments. She would rather see it go to paying off other debt. Honestly, I'm more in that position too.

She checks her investments all the time, as I think most of us do these days, and yes it's easy to get sucked into the "geez my investments had a bad month" because of the easy access to the info through apps.  I know you need a long term view, but being able to see all the ups and downs rattles more conservative people, who view paying off debt as a solid (and guaranteed) option.

[Jack]

Before shifting debt from your student loans (backed by nothing) to your mortgage (backed by your house), make sure you adjust for risk. For example, if your student loan terms still allow for things such as deferment/forbearance due to financial hardship (and loans refinanced with a private lender like SoFi may not, IIRC), that's a strong argument for keeping them rather than putting all that debt against your house where missing a few payments equals foreclosure. Whether that flexibility is worth the extra 1% is for you to decide.

[Nick_Miller]

Before shifting debt from your student loans (backed by nothing) to your mortgage (backed by your house), make sure you adjust for risk. For example, if your student loan terms still allow for things such as deferment/forbearance due to financial hardship (and loans refinanced with a private lender like SoFi may not, IIRC), that's a strong argument for keeping them rather than putting all that debt against your house where missing a few payments equals foreclosure. Whether that flexibility is worth the extra 1% is for you to decide.

That's an excellent point - thank you!