Going back to school or helping a child pay for college can be daunting, especially as college costs continue to rise. Most families are not able to cover the full cost of college with grants and scholarships alone, and many will explore student loans to cover unmet needs.
Homeowners, however, may have another option — refinancing their mortgage to boost available savings.
Saving even just a little bit for college can make a big impact when it comes time to pay the tuition bill. That’s because the more you save, the less you’ll have to borrow. Remember that student loans must be paid back with interest, which can really add up over time.
The easiest way to save money is to reduce spending on the biggest recurring costs in your budget, like a home mortgage. According to U.S. Census Bureau data from July 2021, the average homeowner spends more than $1,600 per month on mortgage and other housing costs.
If you’re a homeowner, you may be able to save hundreds of dollars a month by refinancing your home loan. Doing that could also free up more funds to put toward college tuition.
But refinancing a mortgage may not be the right pathway for everyone. It depends on a variety of factors, like credit scores, interest rates and specific college costs.
If you think refinancing your mortgage to pay for college may be the right move, here are some factors to consider.
Will You Generate Enough Savings in Time?
Individuals with higher credit scores get better interest rate offers on their mortgages, making it possible to save hundreds of dollars a month. For example, a family paying $200 less per month on their mortgage would save $12,000 in five years.
That is more than enough money to cover the average tuition and fees for two years at a community college, according to data reported by the National Center for Education Statistics.
Knowing when college costs are due is another key consideration. It takes years to generate savings from a refinanced mortgage. Some people may not have the luxury to wait five years, for example, because they are going to college right away.
If your goal for refinancing is to save for college tuition, make sure you have enough time to save the amount that you will need before you start or your student begins school.
Loans With Variable or Fixed Interest Rates
Not all lenders charge a fixed interest rate for the life of a home loan. Some lenders use an adjustable-rate loan, also known as a variable-rate loan. This means that the interest rate for the mortgage can vary over time based on market conditions.
Some lenders may offer families an adjustable-rate refinancing loan, but consumers must be aware that interest on such a variable-rate loan can go up over time. The initial rate may be lower, but that may not remain the case. Homeowners could end up paying much more than anticipated if market interest rates skyrocket.
The Federal Reserve recently signaled that it will increase interest rates to help curb inflation. Families thinking about refinancing their mortgage to help pay for college would be smart to consult a financial advisor before doing so and before agreeing to an interest rate that could change later and be costlier over time.
Extending the Mortgage Repayment Term
Extending the loan term of a home mortgage can reduce monthly payments, and in theory families can then spend those savings on college. Yet this strategy also comes with drawbacks.
For example, it may mean that a family pays more interest on the mortgage in the long run, which could end up being less affordable than a student loan depending on interest rates. Check how much in extra interest would accrue before using this strategy.
Alternatives to Mortgage Refinance
Again, not everyone has a home mortgage or the ability to refinance one. For these families, taking out a student loan may be their best or only choice.
And it is not a terrible option. Interest rates on direct subsidized and unsubsidized federal student loans are currently 3.73% for undergraduate students. Many home loans have higher interest rates, especially for families with average or below-average credit.
The federal government tends to offer more favorable student loan terms and conditions than banks and other private lenders. State-based and nonprofit student loan organizations are another good option for families, as they tend to offer student loans with transparent and generous benefits.
Ultimately, there are tradeoffs to every college financing strategy. Refinancing a mortgage could be a decent alternative to taking out a student loan, and families should take the time to pick the best option for their unique needs.
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What to Know Before Refinancing Your Mortgage to Pay for College originally appeared on usnews.com