Paying off student loans with a home equity line?

[brachen33]

Hello all,

Was hoping to pick a few brains out their and see my options. I purchased a house in Phoenix in October, and thankfully the home prices are still going up and up here. I have 23K in student loans left, they are all federal, and I'm paying 10 percent on all of them. Since I can write off a home equity line too, would I be better off taking the loan paying them off and paying a lower percent? My mortgage rate is 3.25 and was also wondering if I would get that same rate, and would the bank even allow me to do this? I'm still relatively young, and unfortunately the one thing they don't want to discuss with you in college is how student loans affect your life afterwards : /, and I'm one of the lucky ones with as low as mine are. Thanks for any advice anyone could give me .

Adam

[bjl584]

You could in theory.

But,
Do you plan to stay in your home long term?

It's tempting because SL aren't excused in bankruptcy. But, should you get in a bind, you can unload mortgage debt.

I probably wouldn't do it, cause I think interest rates will rocket up well before you can pay the loan off.

[mgkimsal]

I'm on the fence. It sounds good on paper, but without seeing the rest of your budget and plan, it's hard to say whether what other risks there are.

If, for example, you were in a position to be on track to have the SL paid off in 5 years, the short term rate savings would offset any slim chance that a HELOC rate would vary over 10% in the next few years. None of us can predict the future, but I think the chances of massive rate spikes in the next 3-5 years is pretty slim.

If you plan on keeping this thing around for the next 10-15 years, I'm not sure I'd take the risk.

Can you just pay the thing off aggressively in the next few years?

HELOC rates seem to be between 5-6% right now - better than 10%, but on 23k, a 4% savings is around ~$1000/year. Certainly would be nice to refi in to a HELOC, but there may be some other fees or 'gotchas' you'd need to research.

Short answer is, yes a bank wouldn't care if you paid off your student loans - they're giving you a loan secured on your house. You're just shifting debt to save some interest, but overall I'd recommend looking in to paying it all off faster regardless of whether you refi to a HELOC or not.

[brachen33]

Thank you guys for the quick reply. The only way I would move from the home anytime soon would be to get rid of our PMI since I only put down 3.5 % and have an FHA loan. About the loans, I would love to be more aggresive paying them off, but I just don't have the extra cash every month. I'm not worried about putting money towards my car or my home since both interest rates are around 3%. I'm also engaged, and my fiance is in the hole about 90K on her student loans. So I do cover most of our expenses every month since half of her paycheck goes strictly towards paying back her debt. I just feel that the quicker I can get myself out of debt, the faster I can start working towards hers. After this tax season, seeing how much in just interest she pays, it's just disgusting and we need to deal with it. But I do understand your guys's points on it might be a riskier gamble to take it out on my house.

[theduc]

A few other things you may consider...

How much equity do you have in your home? If you only have $23K in equity then I don't think this would be a wise idea... I would want there to be enough equity left as a safety net in case the market turned around or if I needed to sell it fast I would still be able to pay off all of the loans.

Can you get a fixed rate home equity loan (not a HELOC)? I know that my credit union offers HELOC's at 4% and they adjust the rate on the first of each month... they also offer a Fixed Rate Home Equity Loan for 3.99% for 10 years. They also offer 5, 7 and 15 year terms but the rates are higher (5.5% and 5.75%).

[disneysteve]

I did use a HEL (not a HELOC) to pay off some student loan debt so yes, I would if the numbers make sense.

I would NOT use a HELOC. You want a fixed amount at a fixed interest rate. That way you don't have to worry about rates rising.

[Slug]

Like the others I like the idea but would recommend investigating a fixed rate option since you are not in a position to pay down aggressively at this point.