Mortgage and student loans...

[ScrimpAndSave]

Maybe I am beating a dead horse...but you guys are the only ones that will listen!

When my fiance graduates, we will be facing $120,000 of student loan debt (for his law school - I am debt free). We will also be looking to buy a home.

A co-worker of mine said that I might want to take out a large mortgage and cover the students loans with it if the interest rate is a lot lower.

Does this make sense?

I've never heard of it.

[Caoineag]

Generally that is if you have private loans. Some private loans are far far worse than credit cards and you can't bankrupt out of them. Those type of loans should be paid off by any means possible. The government based loans though tend to be a lot cheaper than mortgages so less likely you would want to do that.

I nearly died of shock the first time I heard of someone with a student loan whose interest rate was 12%. That is when compounding interest is most definitely not in your favor.

[ScrimpAndSave]

Oh ok.

He will have half under a private loan around 8% and half under a gov't loan of 6.5%.

[tripods68]

First of all, you DON'T want to EVER include his student loans as part of a large mortgage balance with yours. Your essentially making it your responsibility to pay for his SL when you comingle his loans with your mortgage balance. That just doesn't make any financial sense.

He should pay it off as a "stand alone" debt.

Now if you feel you want to contribute in paying off his SL, you should. But never own someone else's responsibility in case relationship does not work out.

[Seeker]

Originally Posted by ScrimpAndSave

Maybe I am beating a dead horse...but you guys are the only ones that will listen!

When my fiance graduates, we will be facing $120,000 of student loan debt (for his law school - I am debt free). We will also be looking to buy a home.

A co-worker of mine said that I might want to take out a large mortgage and cover the students loans with it if the interest rate is a lot lower.

Does this make sense?

I've never heard of it.

Student loans are usually a lower interest rate averaged out than a mortgage, but you'll need to make that determination once you know the details. Also consolidation of student loans could be beneficial. Most of the time student loans are variable...

Both student loans and house/property are tax deductable. So no real advantage there either.

The only advantage I see is possibly the consolidation (one bill to pay) but it only makes sense if the house loan has a lower interest rate than the student loans.

I'm not writing on the co-mingling aspect.... because only you two can determine what's right for you two.

[Seeker]

Oh, another thing. I know you plan on making a rather large down payment.

If the two of you decide on covering parts of his education debt with a larger loan on the house, I'd NEVER recomend that you borrow more than the house is currently worth. And in the future, they may not allow that to happen either.

[MiikeB]

Not only does it seem like a bad idea considering the interest rates you have, but with credit practices tightening you probably could not get away with it anymore anyway.

[Daylily]

Not sure if this is true anymore..... it used to be the case that if a person died, his/her student loans were forgiven. If you've rolled those student loans into some other kind of loan, the portion attributable to the student loans wouldn't be forgiven in the event of a death.

[Seeker]

Originally Posted by Daylily

Not sure if this is true anymore..... it used to be the case that if a person died, his/her student loans were forgiven. If you've rolled those student loans into some other kind of loan, the portion attributable to the student loans wouldn't be forgiven in the event of a death.

Private student loans do not have any such provision; you can ask them, but by law they are not "required" to help you or your family meet the deceased student loan obligations. In other words, they can by law, seek their money back... and will most like through whatever assets the borrower has left in her or her "estate." Probate varies state-by-state.

As of this date, Federal student loans, still does have this protection if the student dies.

But yes, another reason for not mixing loans.

[ScrimpAndSave]

Okay I guess it was a stupid question then.

Thanks all!

[disneysteve]

Originally Posted by ScrimpAndSave

Okay I guess it was a stupid question then.

Not at all. I think it was a perfectly reasonable question. Just because the answer was no doesn't mean the question wasn't worth asking.

[DebbieL]

My original thought was "How the heck do you get a mortgage for that much more than the appraised value on the home?" Then I remembered the whole mess that's happened with mortgages down there (we're somewhat stricter here in Canada - but still have a housing bubble in my area). I wouldn't do it. Like the others have mentioned, I don't think this kind of nonsense will be going on down there anymore either. Things will go back to the old ways - the ways that made sense and didn't get the country in trouble.

[jIM_Ohio]

This might be a good idea. Your student loans have tax deductable interest, but for a finite amount of time. I believe this deduction exists on the 1040A (you don't need to itemize to claim it) and maybe even on the 1040 EZ.

Your mortgage interest is deductable without restriction to best of my knowledge.

Do a tax analysis and see which one nets you the best benefit cash flow and tax wise.

[tripods68]

Originally Posted by DebbieL

My original thought was "How the heck do you get a mortgage for that much more than the appraised value on the home?" Then I remembered the whole mess that's happened with mortgages down there (we're somewhat stricter here in Canada - but still have a housing bubble in my area). I wouldn't do it. Like the others have mentioned, I don't think this kind of nonsense will be going on down there anymore either. Things will go back to the old ways - the ways that made sense and didn't get the country in trouble.

I think what OP doing was taking "cash out" to pay the student loans. Then later, REFI the whole amount both 1st and 2nd into one mortgage loan payment. That's not happening now, unless you have paid off your mortgage.

[DebbieL]

How could you do that? She doesn't currently own a home, so this would be her first time applying for a mortgage, and you can just get an additional $120K more than what the house is worth? I can see if you already own a house and have the equity that you could cash it out, but I don't understand how that would work if you are just buying a house (and seems like a bad idea to me for institutions to lend more than the house is worth). I'm not arguing with anyone, I just don't understand how this would be possible (I don't think it is here in Canada).

[bjl584]

I am currently in the process of consolidating my student loans. The Department of Education will consolidate all of my govt. loans, then I will pay off the remaining private loans that I have outright.

[tripods68]

Originally Posted by DebbieL

How could you do that? She doesn't currently own a home, so this would be her first time applying for a mortgage, and you can just get an additional $120K more than what the house is worth? I can see if you already own a house and have the equity that you could cash it out, but I don't understand how that would work if you are just buying a house (and seems like a bad idea to me for institutions to lend more than the house is worth). I'm not arguing with anyone, I just don't understand how this would be possible (I don't think it is here in Canada).

I agree. That wouldn't make sense. I think and this is pure speculation. Maybe she was thinking of asking her dad taking "cash out" as 2nd since she would be the future owner of the house. She would then later REFI to entire amount into one payment. That's still doesn't make sense either if they plan to buy their own home in 2010. At that point she will own to homes paying two mortgages comingling her hubby SL. Not a good idea.

[Seeker]

Originally Posted by jIM_Ohio

This might be a good idea. Your student loans have tax deductable interest, but for a finite amount of time. I believe this deduction exists on the 1040A (you don't need to itemize to claim it) and maybe even on the 1040 EZ.

Your mortgage interest is deductable without restriction to best of my knowledge.

Do a tax analysis and see which one nets you the best benefit cash flow and tax wise.

Not sure what the part bolded above means. When you pay the interest on the student loans, the interest portion paid is deductible on year that interest was paid. What time limitation is there here? We got receipts for the interest paid, and we deducted it from the years that we paid it (government did not contest this); the actual education took place years before and was in default. But regardless we still got those deductions?

I'm not sure you can use EZ form with interest paid on student loans. May have to use 1040A or 1040.

Yes, you are correct about itemization. The interest paid is separately deductable.

If you don't itemize your interest payments, property taxes, licenses, etc. because your Standard deduction is higher than than itemizations would be, then interest paid is still deductable from the federal perspective. Interest on education loans are not filed along with the deductions (Schedule A I think?); it goes directly on the same schedule as the interest earned / paid schedule as I recall.

But I'd be curious to know what you learned about "time limits" in deductions.

[noppenbd]

Maybe he was referring to the income phaseouts. As your income increases the deductable student loan interest decreases.