Poll

What would you do?

Use Cash to Leverage Student Loan Cash Out Refinance
1 (12.5%)
Just Refinance the Mortgage
4 (50%)
Just Pay Off the Student Loans
3 (37.5%)
Put Cash on Mortgage and Do a Traditional Re-Fi
0 (0%)
Nothing
0 (0%)

Total Members Voted: 8

Author Topic: Complicated Student Loan Cash Out Refinancing Issue  (Read 980 times)

ReadySetMillionaire

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Complicated Student Loan Cash Out Refinancing Issue
« on: October 08, 2020, 10:14:25 AM »
TL;DR/Edit: As I think about this more, I guess I am trying to figure out how to use a bunch of equity in my house.  Bought it for $285k and now it could be appraised at $355k.  How do I use this equity?

My wife and I bought a house for $285,000 in February, and it was an absolute steal.  It was originally listed for $359k.  The appraisal actually came in at $295,000, so we instantly gained $10,000 in equity.

Fast forward to now, and the market is great around here.  Literally every decent house listed gets 3-4 offers within 24 hours.  The house two houses down is 300 square feet smaller, a little more updated, and went for $385k.

Knowing this, and just out of curiosity, I asked my realtor what our house would appraise at now. She sent me back eight comps, including four on my street, and calculated that an appraisal would come in around $355,000. Nice.

That in turn caused me to look at possibly refinancing, which in turn introduced me to SoFi's student loan cash out refinancing.  They will lump everything together, but your LTV has to be 80%, or the most they will loan me (if the appraisal at $355k is accurate) is $284k.

Current Mortgage Balance = $267k
Student Loan Balance = $104k
Total Debt = $371k

Possible Refinance at 3.09% (current rate is 3.625) = $284k

Basically, I would need to put $87k towards my existing loans to lump everything together into the student loan cash out refinance. This would lump what's left on my student loans (6.1% interest rate) and mortgage (3.625%) into one loan.

I currently have about $72k in cash and more on the way (via outstanding invoices). My wife and I also have roughly $30k in principal contributions to our Roth IRAs. Basically, we could put our cash and some of our Roth principals to make this student loan cash out refinance work.

Part of me wonders whether I should just pay off the student loans and leave the mortgage; but I would love to tap into this new-found equity and leverage my interest rates down.

Options

1. Student loan cash out refinance, as described above.

2. Refinance the mortgage as-is to get a lower rate.

3. Gather up cash and pay off the student loans.

4. Put maybe $40k on the mortgage to get rid of PMI and refinance (would lower monthly cost by about $350/month)

5. Do nothing; invest the cash

Any thoughts?
« Last Edit: October 08, 2020, 10:54:21 AM by ReadySetMillionaire »

Morning Glory

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #1 on: October 08, 2020, 10:32:25 AM »
Would the new loan be classified as a student loan or a mortgage? Also what are the closing costs?

ReadySetMillionaire

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #2 on: October 08, 2020, 10:33:21 AM »
Would the new loan be classified as a student loan or a mortgage? Also what are the closing costs?

New loan is a mortgage and the closing costs are between $4-5k.

Fishindude

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #3 on: October 08, 2020, 11:18:27 AM »
Your are just playing games.  You can't borrow your way out of debt.
Just aggressively attack those student loans and put it behind you.

secondcor521

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #4 on: October 08, 2020, 11:28:21 AM »
If I woke up in your shoes:

1.  I would leave the Roths alone.  Pulling money out of those when you're young (sounds like you're young) has such a high opportunity cost - in terms of decades of tax-free compounding lost - that it's not worth it.

2.  If you're going to be in the same house/mortgage for the next several years (probably at least 3, preferably 5), I'd do the refinance and throw any cash out immediately at the student loans.

3.  I'd also throw as much of the $72K plus whatever else you can scrape up at the student loans, leaving a few months of expenses in an emergency fund, depending on your job(s) and it/their stability.

I'd also probably pencil out whether refinancing to a 15-year-fixed would make sense.  Your payment will go up, but your interest rate could be in the 2.5% range and you'll build equity faster.  I know this is not a hugely popular idea on MMM and I understand why, but I thought I'd mention it just in case.

But the sentiment that @Fishindude expressed is also true and important.  The refi would help some, and throwing the extra cash will help too, but the real solution is to just buckle down and throw everything at the student loans until they're gone.  Once you focus on paying things off and get aggressive, it's pretty amazing how much progress you can make and how fast that progress happens.  I had the same experience paying off my house...once I committed to it and threw everything at it, I had it paid off in about six or seven years.

ReadySetMillionaire

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #5 on: October 08, 2020, 12:55:12 PM »
Thank you for the sentiments @Fishindude and detailed comments @secondcor521 .

I hear you on not playing games and everything you say makes sense.

Prior to this potential refinance issue, I was generally looking at a ten-year FI plan. Basically, I've had this realization this year that I kept saying "10 years" every year for the past three years, so I wanted to commit to it by the end of this year.  That meant refinancing my student loans to a ten year term and making small balloon payments every year on the mortgage. Basically, no debt on January 1, 2030, probably $750,000 in investments, and my wife and I having a couple small jobs and some real estate.

I have struggled with this cash issue this year because my student loans were frozen at 0% with zero payments due to COVID. That meant throwing money at them this year was silly.  If you look at some of my other threads, I have gone down from $157k in loans to $104k in just 18 months or so.

I seem to go through this same neurotic process at the end of every year. On one hand, I enjoy chasing efficiency; but on the other, I am growing a bit tired of the endless analysis, which is why I'm strongly considering implementing the 10-year plan described above.

But, as I was doing that, I realized I had all this equity. I thought maybe there was some way to get that wedged into my plans and make my goals happen a little faster. If not, fine, and what you guys say certainly makes sense.

Laura33

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #6 on: October 08, 2020, 01:16:02 PM »
Yes, you have equity - but only about $12K of that is accessible because 80% LTV + costs. So do your analysis with $12K as the delta, not the perceived $70K that you can't actually access unless you sell the house. 

I think refi probably makes sense given the difference in rates and the time left on your loan (and I like the 30-yr for now, because you're still young, your solo practice income is variable, you may be opening a new business, and your higher-priority debt is the student loans).  But again, evaluate the refi on its own sake, not as a way to play three-card-monte with your debt.  One suggestion:  check what rate you could get if you did NOT cash out -- often rates are higher if you are taking cash out than if you are just doing a refi of your remaining balance. 

Do not, under any circumstances, raid your Roths.  A, you can't get that back.  And b, you'd be using future savings for past expenses.  The way to get to FI quickest is to keep your retirement investments sacrosanct, and then figure out how to live as frugally as possible on the rest of it. 

My advice:  refi.  If you can get cash back at the same rate, then by all means, take that $12K and throw it at your loans.  Figure out what you need as an EF, and then throw the rest of your cash at the loans.  After that, just make yourself the commitment that you're going to get rid of those loans ASAP and throw your extra income at it, like you have been doing. 

Fishindude

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #7 on: October 08, 2020, 01:18:16 PM »
But, as I was doing that, I realized I had all this equity. I thought maybe there was some way to get that wedged into my plans and make my goals happen a little faster. If not, fine, and what you guys say certainly makes sense.

Nice to have equity, but you have to borrow from the bank in order to access it, meaning debt, just arranged differently.
Work a second job or really cut back expenses in other areas of your life to attack that debt.   This is really simple Dave Ramsey type stuff, you've just got to tackle it head on.

ReadySetMillionaire

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #8 on: October 08, 2020, 01:31:31 PM »
Yes, you have equity - but only about $12K of that is accessible because 80% LTV + costs. So do your analysis with $12K as the delta, not the perceived $70K that you can't actually access unless you sell the house. 

I think refi probably makes sense given the difference in rates and the time left on your loan (and I like the 30-yr for now, because you're still young, your solo practice income is variable, you may be opening a new business, and your higher-priority debt is the student loans).  But again, evaluate the refi on its own sake, not as a way to play three-card-monte with your debt.  One suggestion:  check what rate you could get if you did NOT cash out -- often rates are higher if you are taking cash out than if you are just doing a refi of your remaining balance. 

Do not, under any circumstances, raid your Roths.  A, you can't get that back.  And b, you'd be using future savings for past expenses.  The way to get to FI quickest is to keep your retirement investments sacrosanct, and then figure out how to live as frugally as possible on the rest of it. 

My advice:  refi.  If you can get cash back at the same rate, then by all means, take that $12K and throw it at your loans.  Figure out what you need as an EF, and then throw the rest of your cash at the loans.  After that, just make yourself the commitment that you're going to get rid of those loans ASAP and throw your extra income at it, like you have been doing.

Thanks.

But, as I was doing that, I realized I had all this equity. I thought maybe there was some way to get that wedged into my plans and make my goals happen a little faster. If not, fine, and what you guys say certainly makes sense.

Nice to have equity, but you have to borrow from the bank in order to access it, meaning debt, just arranged differently.
Work a second job or really cut back expenses in other areas of your life to attack that debt.   This is really simple Dave Ramsey type stuff, you've just got to tackle it head on.

I already work for both the city ($66k/year with benefits) and my own solo practice ($60-75k/year). I have plenty of funds to move around; this thread was just about potentially optimizing the equity.  I hear what you're saying though.

Morning Glory

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #9 on: October 08, 2020, 02:59:38 PM »
Wait, your student loans are at zero right now because of COVID? Just refinance your mortgage to get a better rate; the closing costs should be lower if you donít take cash out.. When the interest on the student loans gets reinstated you can always refinance them separately.

ReadySetMillionaire

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #10 on: October 12, 2020, 07:51:41 AM »
Wait, your student loans are at zero right now because of COVID? Just refinance your mortgage to get a better rate; the closing costs should be lower if you donít take cash out.. When the interest on the student loans gets reinstated you can always refinance them separately.

Payments stopped and interest stopped accruing.  Initially the freeze was until July, then October, and now until the end of the year.

I want to crush these student loans one way or another, but it's almost impossible for me to mentally put so much money towards something accruing 0% interest.

BUT, part of me thinks -- that makes this the perfect time to pay them down. I can make huge dents and not accrue interest in between lump sump payments.

First world problem, I know, but I confront my re-strategizing every year.

Kayad

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #11 on: October 13, 2020, 01:17:08 AM »
Why do you have to put all your cash to your student loans in order to roll some of them into your mortgage?  Is that a requirement from sofi-you have to zero out your student loans?

Transferring 6% loan to 3% is a good move.  Transferring 0% current loan to 3%, not so much. 

Iíd say wait a year; interest rates certainly arenít going to explode, you may have even more equity, and you can see what happens to federal student loans.

Or... deal with them separately.  Refi now, and refi student loans later, when rates kick back in.  I have sub 1% variable rate student loan refi right now (5 year term), so if you are jonesing to crush your debt anyways, you can probably do better than rolling it into 30 year mortgage.  Small factor, but you would also lose the SL interest deduction on your taxes converting it into mortgage debt (presumably, Iím not speaking as a tax authority).

researcher1

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Re: Complicated Student Loan Cash Out Refinancing Issue
« Reply #12 on: October 13, 2020, 06:23:59 AM »
Current Mortgage Balance = $267k
Student Loan Balance = $104k
Possible Refinance at 3.09% (current rate is 3.625) = $284k

Basically, I would need to put $87k towards my existing loans to lump everything together into the student loan cash out refinance. This would lump what's left on my student loans (6.1% interest rate) and mortgage (3.625%) into one loan.
I currently have about $72k in cash and more on the way. My wife and I also have roughly $30k in principal contributions to our Roth IRAs.
4. Put maybe $40k on the mortgage to get rid of PMI and refinance (would lower monthly cost by about $350/month)
Dude, you are WAY overthinking this.
It makes absolutely zero sense to roll your student loans into your mortgage, while paying $5K in closing costs for the privilege of doing so, especially when your student loans are at 0%.

You need to get rid of PMI immediately.
You claim your house will appraise for $355K and you only owe $267K, which means you are already at the 80% LTV threshold, without throwing any money at it.
Refinance the house tomorrow with a low cost lender.  This will eliminate PMI and lower your rate.

You also said you have enough cash that you could pay off the $104K student loans if you wanted to.
Since the student loans aren't costing you anything now, just stockpile the money.
When interest on the loan kicks back in, then pay them off with your available cash.