I am considering refinancing my mortgage and have an opportunity to take cash. Should I pay off student loan?

Question by ricko: I am considering refinancing my mortgage and have an opportunity to take cash. Should I pay off student loan?
First off, my student loan is at 3.65 fixed for an amount of appros 12,000. My refinance rate for my mortgage is about 4.9% x 30yrs fixed. Would it be wise to take out an additional $ 12,000 at that rate to pay off a student loan that is at a lower fixed rate?

Best answer:

Answer by Nymphonicz
No its not – you’ll end up paying more over the long term. Keep the student loan as is; if you don’t then you could be in for some financial hardship.

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3 Responses to I am considering refinancing my mortgage and have an opportunity to take cash. Should I pay off student loan?

  1. Let me steer you says:

    Absolutely not. Keep paying on the low interest student loan and don’t take cash at the refinance unless you need it for an emergency. That cash you “take” will be secured by your home and you don’t want to do that in case you get in a financial bind you could end up losing the house.

  2. Sluce says:

    Well, your student loan is probably for a shorter term, most likely 10 years, so even though the interest rate on it is lower your payment is probably larger than if you had a higher interest rate 30 year loan. So, you have a couple of things you will want to consider.

    First, there are certain benefits to having a student loan since there are instances where you can defer your payments. If you have a Stafford (most common) or Perkins loan then principal and interest payments may be deferred while you are:

    * Attending school at least halftime.
    * Unemployed (up to three years).
    * Studying in an approved graduate fellowship or rehabilitation program for the disabled.
    * Experiencing economic hardship (up to three years).

    The downfall to keeping the student loan is the higher near-term payments that may actually cause you hardship.

    Second, if you take the cash out on a home refinancing then you will be paying a higher interest rate and, thus, more interest over the life of the loan. But, you will have lower payment amounts on that portion of your loan which can ease any financial burden you have now or free up cash for other things (savings, investments, frivolous spending). Additionally, it is assumed and expected that as you go further in your working life you will make more money down the road which will make those payments less and less of a burden. The biggest downfall with this option, however, is not having the option to defer the payment if you go back to school or have a financial hardship.

    So, what should you do? Well, that’s ultimately your decision. There are so many other factors to consider. If I was you, I would probably wrap the loan into my mortgage to free up cash now that I would then save, putting most of it in a money market account or laddered CDs (what they call it when you take out a bunch of CDs with different maturity dates i.e. 3 mths, 6 mths, 9 mths, 1 year, etc). That way if anything did go wrong I would have a reserve fund to pay my bills and see me through any hardship. This way I would have reserves to pay my mortgage (including my wrapped in student loan) and any other bills I might have avoiding foreclosure and perhaps bankruptcy.

    Ah, speaking of bankruptcy, if you ever did have to file then a student loan cannot be discharged (meaning that you will still owe on that loan post bankruptcy) but other types of loans can be discharged.

    Lastly, if your student loan has been consolidated and is now over a 30 year term at 3.65% fixed then ignore the above advice and don’t pay it off.

    Hope this helps

  3. My Take on It says:

    That would be ill advised

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