Should I use a home equity loan to refinance my student loans at a lower interest rate?
This can be risky. Student loan borrowers who have built equity in their homes may find that paying back outstanding student debt with a new home equity loan looks appealing, but putting more debt on your home can lead to problems down the road.
Before you take out a home equity loan to pay off a student loan, you should try to look for a student loan refinance product first and see what rate you can get. You may be able to lower your interest rate without some of the risks that come with a decision to tap the equity in your home. Here are a few things to remember:
- Your rate may be lower, but your home is at risk. Interest rates for home equity loans are generally lower than interest rates for student loans. Lenders are willing to offer a lower interest rate because they know that if you don’t pay, they have a legal claim on your home. If you can’t pay, you could end up in foreclosure.
- On your federal loans, you are giving up repayment options and forgiveness benefits. Federal student loans feature a number of protections for borrowers that run into trouble, including Income-Driven Repayment. These benefits no longer exist when you pay off a federal student loan with a home equity loan.
- This may impact your taxes. You may wish to consult with a tax advisor when considering your options.
For student borrowers with plenty of savings for a rainy day, a steady income, and a solid understanding of the tax benefits, a home equity loan may offer an opportunity to pay off your student loans at a lower interest rate. But again, there is always a risk of losing your home if you don’t make your payments.