What you need to know before refinancing your mortgage to pay for college | Student Loan Ranger

Getting a child back to school or helping pay for college can be a daunting task, especially as college costs continue to rise. Most families cannot afford the full cost of college with grants and scholarships alone, and many will explore student loans to meet unrestricted needs.

However, homeowners may have another option – refinance their mortgage to maximize available savings.

Saving even a little for the college when it comes time to pay the tuition bill can have a huge impact. Because the more you save, the less you have to borrow. Keep in mind that student loans must be repaid with interest, which can add up over time.

The easiest way to save money is to reduce the cost of the largest recurring expenses in your budget, such as a home mortgage. According to the U.S. Census Bureau data from July 2021, the average homeowner spends more than $ 1,600 a month on mortgages and other housing expenses.

If you are a homeowner, refinancing your home loan can save you hundreds of dollars every month. Doing so will free up more funds for college tuition.

But refinancing a mortgage may not be the right way for everyone. It depends on various factors such as credit scores, interest rates, and specific college expenses.

If you think refinancing your mortgage to pay for college is the right move, here are some factors to consider.

Will you make enough savings in time?

Individuals with high credit scores get better interest rate offers on their mortgages, which can save them hundreds of dollars per month. For example, a family pays less than $ 200 a month in their mortgage, saving $ 12,000 over five years.

According to figures from the National Center for Education Statistics, this is more than the average two-year tuition and fees required to pay for a community college.

Knowing when college expenses will come is another important consideration. It can take years to generate savings from a refinance mortgage. Some people may not have the luxury of waiting five years, for example, as soon as they go to college.

If your goal for refinancing is to save for college tuition, make sure you have enough time to save the required amount before you start or before your student starts school.

Loans with variable or fixed interest rates

Not all lenders charge a fixed interest rate for the life of a home loan. Some lenders use an adjustable rate loan, also known as a variable rate loan. This means that the interest rate on a mortgage may vary over time, depending on market conditions.

Some lenders may offer families an adjustable-rate refinancing loan, but customers should be aware that the interest on such variable-rate loans will increase over time. The initial rate may be low, but it may not be sustainable. If market interest rates rise, homeowners will have to pay more than expected.

The Federal Reserve recently hinted that it would raise interest rates to curb inflation. Families who are thinking about refinancing their mortgage to help pay for college are better off approaching a financial advisor before doing so and then agreeing on a variable and costly interest rate over time.

Extends mortgage repayment period

Extending the term of a home mortgage loan will reduce the monthly repayments and theoretically families will be able to spend that savings on college. However, this strategy comes with drawbacks.

For example, it could mean that a family pays more interest on a mortgage in the long run, which may end up being more affordable than a student loan, depending on the interest rate. Before using this strategy, check how much you will get at extra interest.

Alternatives to Mortgage Refinance

Again, not everyone has the ability to mortgage or refinance a home. For these families, a student loan may be their best or only choice.

And it’s not a terrible option. The interest rate on direct subsidized and non-subsidized federal student loans is currently 3.73% for graduate students. Many home loans have high interest rates, especially for families with average or below credit.

The federal government offers more favorable student loan terms and conditions than banks and other private lenders. State-based and non-profit student loan organizations are another good option for families because they offer student loans with transparent and generous benefits.

Ultimately, all college financing strategies have tradeoffs. Refinancing a mortgage can be a decent alternative to taking out a student loan, and families should take the time to choose the best option for their unique needs.

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