If you own your home, have a substantial amount of equity in your property and still have student loans to pay back, it could make sense to use your home equity to pay down your student loans. Indeed, you could use your home equity to pay off any other kind of debt.
What is home equity?
If you’re not fully aware, your home equity is the amount that your property is worth at present, minus the amount you owe on your existing mortgage.
For example, if the current market value of your property is £500,000 and you owe £200,000, your equity would be £300,000.
How does a home equity loan work?
With a home equity loan, you can use some or all of the equity in your home as collateral for a new loan.
You could apply for SoFi student loan refinancing, for instance, and then you would be able to pay off a lump sum of your debt.
Many people apply for home equity loans because they are easier to qualify for than unsecured loans. Home equity loans also often have a lower APR in comparison to unsecured loans.
How do you go about using home equity to pay down your student loan or other debt?
When you decide to use home equity to pay down your student loan or another debt, you need to contact your mortgage lender.
The lender will then order an appraisal of your property and show you how to get started on the paperwork.
It’s also highly recommended that you check your credit score before proceeding with making use of your home equity to pay down your debt.
That’s because in order to secure a cash-out refinance, your lender will typically require you to have a credit score of at least 620.
Though, the exact score required to qualify for cash-out refinance can depend on various factors, such as your income and the amount of equity you have.
If your credit score isn’t high enough to qualify for cash-out refinance, you should look at improving your credit score before you apply.
Also, when you do apply for cash-out refinance with your lender, make sure you have all the paperwork that’s required handy. You may need to provide things like bank statements, tax filings, and pay stubs.
The Pros and Cons of Using Home Equity to Pay Off Debt
Using your home equity to pay off all or some of your student loans can be a good idea.
However, there are disadvantages as well as advantages to this option, so you should spend time carefully weighing up the pros and cons before you proceed.
If you take out a home equity loan to pay off your student loan or other debt, you will still need to pay back the home equity loan. If you’re unable to do so, the worst-case scenario is you could lose your home to foreclosure.
Furthermore, defaulting on an unsecured debt could harm your credit for years.
And, even if you use your home equity responsibility, there’s always the chance that your home could depreciate in value. If that should happen, you may be unable to sell your home for a long time. You may need to patiently wait for your home’s value to increase before you can be back in a sound financial position.
The main pro of using home equity to pay off your student loan or another debt is that you can eliminate those specific debts.
Furthermore, the interest rates for home equity loans are usually significantly lower than rates for other types of loans.
And with a lower interest rate, you can pay down more of your debt quicker.
So, paying off your higher-interest loans with a lower-interest loan can save you a lot of money in the long term.