Cash-Out Refi to Pay Off Student Loans?

[turbo89]

Hi all,



DW and I are considering taking a cash-out refi to pay of our remaining student loan debt. This is our last remaining debt, except for our primary residence and my wife’s car ( 2yrs left @ 2.24%). I think this would also offer some tax benefits (our combined income is too much to write off student loan interest).



Home Value: Approx $360k ( 3.625% 30 yr fixed rate, $191k left)

House equity: $169k

Student Loan Payoff: $ 90k @ 4.5%



We have an additional $52k on hand in savings/taxed brokerage accounts, but would prefer to keep this on hand as an emergency fund.



Has anyone done this, recommend for or against it? I'm a little concerned that the cash-out refi would raise our interest rate. We're also considering moving again within the next 2 yrs or so.



Thanks!

 

[Sunset]

I'm wondering about the tax benefits, do you currently do your own taxes and have looked at the value of itemizing deductions vs standard ~ $24,000 deduction ?
There may not be any value here, and could be a red herring.

There does not seem to be a lot of room in house equity to absorb the student loan, assuming you want to stay over the 20% so you don't pay PMI (extra charges).
Possibly an injection of some of your emergency money would be needed.
With both working, should one of you lose a job, how long could you go with a lower emergency fund, as possibly the bank will evaluate your home for less on the refi (happened to me) as they are sometimes conservative to protect their interests.

Finally, do you fit into any of the special "programs" to eliminate student debt ?

 

[sengsational]

It looks like a pretty close call, but without specifics on the new loan and closing costs, it's hard to say. Moving in 2 years ... for me, that would crush the deal. Not because you might not come out ahead, but because coming out slightly ahead isn't worth the pain associated with the refi.

 

[turbo89]

Great responses!

Sunset,

I do our taxes, and we did end up taking the standard deduction last year, because we didn’t have enough write-offs for itemizing to make sense. We agree with your comment on PMI and would supplement as necessary to avoid those fees.

Admittedly i haven’t looked to see if we qualify for any forgiveness programs, but we both work in the private sector and haven’t been impacted by COVID. We’re you thinking of something specific?

We could live on either of our incomes, covering all bills, so the emergency fund would last for years (would likely increase).

Sengsational,

I have not investigated rates yet, I do plan to call some banks this week. We both have 800+ credit scores, so I’m assuming we’ll get the “best rate” on this type of refi ( I’m guessing low-mid 3’s). Agreed that the 2 yr plan throws a bit of a wrench in it.

 

[FreeBear]

Hi all,

DW and I are considering taking a cash-out refi to pay of our remaining student loan debt. This is our last remaining debt, except for our primary residence and my wife’s car ( 2yrs left @ 2.24%). I think this would also offer some tax benefits (our combined income is too much to write off student loan interest).

Home Value: Approx $360k ( 3.625% 30 yr fixed rate, $191k left)

House equity: $169k

Student Loan Payoff: $ 90k @ 4.5%

We have an additional $52k on hand in savings/taxed brokerage accounts, but would prefer to keep this on hand as an emergency fund.

Has anyone done this, recommend for or against it? I'm a little concerned that the cash-out refi would raise our interest rate. We're also considering moving again within the next 2 yrs or so.

Thanks!

What about another option?? I'd be inclined to just pay the minimums on the house and student loan and buy total market stock index funds instead. Over the decades, you'll probably come out ahead.

A bigger shorter term issue is your potential move. You don't want to be short on equity and have to put money in to sell or have to pay PMI on the new place if you can't raise enough for a big down payment. Remember that the seller pays most of the closing costs including the 5%+ to the realtors. Also, you probably won't recover the refi fees, direct or hidden in the rate, if you sell soon. I definitely wouldn't want to draw down the emergency fund since this isn't an emergency.

So far, it's been a seller's market, but anything can happen given COVID. If your home value drops and you pull out tons of equity, you could have a hard time getting out of your current place without putting more money in.

Finally, I'm reluctant to encumber (ie risk) my house with essentially a student loan hiding as a HELOC.

 

[treeofpain]

Not sure what your monthly expenses are or the security of your job/income, but I would keep a minimum of 3 months' expenses in savings.

I would not do a cash-out refi to pay off student loans. If this is a priority, downgrade the car to get rid of the 2 years of payments and throw extra money at the student loan.

 

[rodi]

The moving in 2 years makes it a no brainer to NOT do this. Refi's involve fees/costs (appraisal, points, doc charges, etc.) That's money you will not recoup. And if you're selling the house in 2 years it makes it extra painful because those fees/costs aren't amortized over a very long period.

I wouldn't do it.

 

[turbo89]

Thanks for all the responses. Let me try to answer some of the questions.

We have a little under 10 months of expenses in our emergency fund (approx 4 months is in cash or equivalents). Also not mentioned above, we have $17k in our HSAs in a mix of cash / bonds / stocks. Our jobs are also reasonably secure, as both of our companies are not exposed to COVID related downsizing (we know we're fortunate).

We've been hit with approx $20k of home repairs in the last 6 months, but now almost everything in the house is new / recently repaired. Now that we're through those repairs, we're saving $4,500/month (mix of pre and post tax investments).

FreeBear,

You proposed strategy is essentially the path we're on (whether or not we refi). DW and I are being a little conservative with investments to ensure we have cash / equivalents on hand for our next home purchase. While we have a lot of equity, we're planning to move to a town with "great schools" in a HCOL state (MA).

 

[Sunset]

...

Admittedly i haven’t looked to see if we qualify for any forgiveness programs, but we both work in the private sector and haven’t been impacted by COVID. We’re you thinking of something specific?

.... Agreed that the 2 yr plan throws a bit of a wrench in it.

Some types of employment qualify for forgiveness after a set time period as long as payments have been made. I'm not an expert on student loans, so best for you to look it up.

The 2 yr move, really kills the benefit of refi, as other's have said, and also means you want to have cash available for the move, and the cost of a possibly more expensive house.

 

[mystang52]

How many individual student loans are there? Can you prepay maybe $20,000 from your emergency fund towards one of the loans? Would such an action pay off one loan entirely, or at least mean it gets paid off in less than a year? If yes, that might be a good intermediate action.

 

[timo2]

One factor that is beyond the financials is the mental burden of debt. It is possible that making some less than ideal financial moves that also remove the mental burden of debt are well worth the tradeoff. That's been my experience anyway.

 

[cyber888]

Get a HELOC that is lower than 4.5% and transfer your student loan there. HELOC rates at 2.99% are available. should save you 1.51% in interest. HELOC has zero closing cost, so no added cost there.

 

[Sunset]

Get a HELOC that is lower than 4.5% and transfer your student loan there. HELOC rates at 2.99% are available. should save you 1.51% in interest. HELOC has zero closing cost, so no added cost there.

But then they move in 2 years and HELOC is due, leaving little cash after the house sale for the next house purchase.

 

[cyber888]

But then they move in 2 years and HELOC is due, leaving little cash after the house sale for the next house purchase.

But in those 2 years, they would have almost wiped out the student loan by saving on a much much lower interest rate. So they will actually have a lot more cash from the interest saved .. and I mean .. tons ..and no more student loans

 

[pb4uski]

Definitely don't cash out refi if you expect to move in a couple years. Even if your new mortgage rate is 3%, that 1.5% savings is less than $270 in the next two years ($90k*(4.5%-3.0%)*2).... and the costs of refinancing are much more than that.

If you were refinancing anyway it might be viable, but even refinancing a 3.625% to 3.0% isn't enough of a savings to make refinancing worthwhile if your time horizon is just a couple years.

 

[samcat]

If you are moving in two years, do not refi. You start the clock all over again.

Do Dave Ramsey's plan. Put your student loans in order of smallest to largest and pay the smallest off and then add that payment to the next one.

Don't rely on any student loan forgiveness. In most all cases, it doesn't work and if it does work, you have to claim the forgiven amount and pay taxes on it.