Is it ok to take out a home equity loan to pay off student loan debt, and pay off the house all at the same time?

Is it ok to take out a home equity loan to pay off student loan debt, and pay off the house all at the same time?
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#1

We have enough equity to get a loan in the 3-4% range. This will cover the student loans which are 6.0% and 6.8%, and the home loan which is 5.2%. Is this a wise course of action or does this seem like it’s just going to cause trouble? We cannot refi at the moment (3 more years) due to a bankruptcy two years ago. I’m just trying to get the monthly payments down and see about having one payment to make. Thank you for any help in this matter.


#2

From a purely financial point of view, it’s not a bad idea, if you can truly get that rate. However, I would have several questions on it:

  1. If your credit due to the bankruptcy is preventing a refi, how are you going to qualify for the equity loan? Even if you have sufficient equity, they will also look at your credit. If it was a Chapter 13 bankruptcy, it is still possible to refi during the repayment period with permission from the court if it improves your financial situation. You would need to contact the trustee and investigate how to do that. If it was a Chapter 7, you can usually be considered for a refinance (FHA) after only 2 years. So I would first look again for a regular refinance – it should not take 5 years just because of the bankruptcy. However, you would have had to rebuild some credit after the bankruptcy in order to be considered, so if you have negative credit after the bankruptcy, that will probably prevent both a refi AND an equity loan. Shop around and talk to several possible lenders for several different types of loans (FHA, conventional, etc.) and for both a refi and an equity loan to be sure. Be up front about your credit and bankruptcy history and see what they can do.
  2. Many experts caution about burdening your home with additional debt, because if you have a financial setback (job loss, pay reduction, medical bills, etc.) you put your home in more jeopardy by owing more on it at a difficult time. Now of course if your payments are lower with the new loan than they were with the mortgage alone before, then that’s not as much of a concern, as you aren’t making the home harder to carry. But in general you don’t want to make your house payment more difficult just to eliminate other payments like student loan debt; you want to be able to stay in your home even if your financial circumstances take a turn for the worse.
  3. You should also consider tax consequences, which depend on a lot of information you don’t provide here (income, etc.). I would consider consulting with a tax professional about what impact, if any, this would have on your tax liability to be sure the net effect is still positive.
  4. Are they YOUR student loans, or one of your children’s? You may not want to transfer responsibility for the loans from your children to yourself. Many parents do this thinking they are helping them get a good start, but leave themselves short and struggling in retirement – and then the children have to help the parents, something most people don’t want to happen. Of course, if they are your loans, this is irrelevant.
    Be sure to give all these questions some thought before making your decision. Best wishes for your financial future!
    ~ Natalie Lohrenz, Certified Consumer Credit and Housing Counselor

#3

A few things.
If you cannot refinance, you may have trouble getting a home equity loan (HEL). While you may have enough equity in the house to get a loan from that standpoint, they will still look at your credit, income, etc. prior to approval. So, with a bankruptcy on your record, it is likely that you would find it difficult to get approved for a HEL, particularly if you have already had trouble doing a refi.
Additionally, with a bankruptcy on your credit report, even if you did get approved, it might be at a higher rate than 3-4%.
Without knowing the value of your house, how much equity you have in it, how much you have in student loans, etc., it is impossible to say for sure, but it seems like it might be difficult to get a HEL large enough to pay off all the student loans AND essentially refinance the current mortgage.
Additionally, HEL are usually required to be paid over a shorter period of time than a “regular” mortgage, so depending on the length of your original loan, how long you have left, amount financed, etc., you may find that the monthly payment actually increases even though the interest rate would be lower.
Ultimately, given some of the missing information, I suspect that getting an HEL may prove more difficult that you might think.
However, if you truly can get a HEL with a 3-4% rate (HEL rates tend to be at least somewhat higher than regular mortgage rates, so a 3-4% HEL may not actually materialize) that is enough to pay off all student loans and the existing mortgage, lowers your overall monthly payments, and doesn’t extend the payoff period of your existing mortgage, then it may make sense to go ahead and do that. But without knowing quite a bit more about your overall financial situation, it is difficult to say with any level of certainty.


#4

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