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Should I refinance or go HELOC or what? Want some advice!

257 18 November 16, 2017 at 07:28 PM
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Hi folks,

I'm relatively new to the finance forums here, being as fatwallet finance was still up and running until just recently. Long time deals forum user. Anyway I want to ask for some advice based on my situation.

I have some student loan that i'd like to refinance into a lower interest rate. Total is about 84k, Part of it is at about 7.5% part of it is at 8.5%. Not great rates here. Payments are kind of high too there...they want about 1000 a mo when not in income based repayment, if i recall correctly. So I'm thinking I'd like to refinance them. Forgiveness isn't an option on the loans for me.

My first option I'm thinking of would be to refinance my house. I own a home which I purchased about two years ago. I paid a good price and i've got about 150-200k of equity that I can tap out of it. Unfortunately I stupidly paid points on my mortgage to get the rate down, not realizing I'd want to refinance so soon. So I'm thinking I'd really hate to refinance and lose any benefit of paying those points.

So I'm wondering if I can do a second mortgage and leave the first one in place....Calling Quicken Loans my mortgage holder the don't seem to do second mortgages. But others obviously do.

To complicate matters I want to be able to expand my house in the next couple of years. I'd like to be able to draw out some maybe 75-125k to do an expansion. I'm pretty confident that in my area I'd have a nice ROI on any expansion.

I'm a bit tight on cash flow right now. I make a decent income and can pretty easily cover our expenses, but I'm not saving much aside from doing 401k 6% + 3% employer match at the moment. I live in an expensive area and have a new baby etc. Live relatively frugally, probably too much so considering my situation.

So a few more questions: are student loan refinancing options independent of tapping my houses equity all crap? Should I consider some of those?

How about a HELOC? I understand those might be nice because it's revolving and as I pay it down I can re-tap it. However I'm worried the payments will be larger.

Well thanks for any input you may have!

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#2
My first idea would be to simply refinance the student loans. Before you do that make sure the there are not any compelling reasons to keep the current loans. You already stated no loan forgiveness, is the income based repayment feature valuable to you? Not sure if there other aspects to consider.

Look into SoFi, they are probably the most popular company to refinance student loans.

I would not recommend the HELOC or second mortgage as your first option. Why put your house up as collateral if you don't have to? In the event something goes wrong and you cannot make your payments the bank will foreclose. It might be an unlikely scenario but it makes sense to protect yourself from the possibility.

Paying points for the interest rate is a sunk cost, you can never get that money back. If that happened to be the best route then don't factor in money spent. Read about sunk costs and it may change the way you think.
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#3
Thanks for the input Rob.
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#4
The main issue with HELOCing a house to pay down debt, IMHO, is that if you decide to sell the house, that equity is gone. IOW, if you kept the standard debt payments and sold the house, you'd still have the equity to, say, buy another house (d/p); if you cash out the house (equity) to pay off debt, what happens if you want to move? No more d/p for you, unless you have a huge amount of equity (or small debt). IT all depends on your comfort levels and how much you'd save by consolidating under a HELOC. Run the amortization tables to get an idea of how much that route would save you and get a handle on the numbers.
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#5
How about you just buckle down and pay the loans as fast as you can? Why don't you figure how much interest you'll save the faster you get rid of the debt?
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Sounds like you are in a bind. I recommend that you tackle the student debt by coming up with a repayment plan that is realistic. It doesn't not sound you will be able to both restructure your student loans and have enough room left for a house expansion in the near feature.

If you refinance your student loans through the equity of your house, it might not be such a bad idea, if you do half of the balance, you can put the other half on the HELOC, and make interest only payments on the HELOC depending on the term the bank will offer you, whether it's 5 or 10 years as far as the revolving period.

That way you can focus on the repayment of the higher interest rate student loan since the HELOC rate will be far lower.

This is a delicate situation, I wouldn't normally recommend putting student loans on a house, unless your are able to quickly pay it off within the next 5-10 years. The other risk you will be taking is the HELOC interest rate which is variable and so if rates move up, you will end up paying a higher rate. The plus side of HELOC is that interest payments are deductible towards your taxes and so I would consult with a CPA before you make any type of move like this.

I say toughen up and find a way to restructure the student loans, find a loophole and or make them income contingent.

You obviously have the choice of refinancing the entire portion of the student loan into your mortgage, but this will require a full refinance, it may end up saving you money on the long run, and interest payments could be deductible (subject to change with the new Trump tax plan).

Expanding the house will not be beneficial unless you are planning to sell the property in the near future.

Borrowing on a HELOC or mortgage will require your income to be underwritten and so you will have to have no more than 40-45% Debt-to-income ratio when borrowing, including all other debts (cards, car payments, student loans payments, etc)

Hope this helps!
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Quote :
The plus side of HELOC is that interest payments are deductible towards your taxes and so I would consult with a CPA before you make any type of move like this.
The new tax law that is being considered in Congress right now will disallow deductions from HEL or HELOC's. This has been a popular strategy to use in the past but will go away if this legislation is passed.

And if if they could take a deduction, if this person is married and filing jointly it will be incredibly hard to beat the new standard deduction of $24K to even claim a mortgage deduction on their taxes.
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Last edited by shifrbv December 6, 2017 at 10:34 AM.
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