As college costs keep going up, it can be scary to go back to school or help a child pay for college. Most families can’t fully pay for college with handouts and scholarships alone, so many will look into student loans to make up the difference.
But homeowners may have another choice: they can refinance their mortgage to save more money.
It can help a lot when you have to pay for college if you save even a little bit in advance. Because you won’t need to borrow as much if you save more. Don’t forget that you have to pay back student loans with interest, which can add up fast.
The best way to save money is to cut back on your biggest, most regular expenses, like your mortgage. In July 2021, the U.S. Census Bureau found that the average homeowner spent more than $1,600 a month on their mortgage and other housing bills.
People who own their own homes may be able to save a lot of money every month by refinancing their home loans. Getting rid of that could also free up more money for college.
But changing a mortgage might not be the best choice for everyone. It depends on many things, such as your credit score, interest rates, and how much college costs.
If you want to pay for college by refinancing your home, here are some things you should think about.
Will you be able to save enough time?
Better interest rates on homes are available to people with better credit, which can save them hundreds of dollars a month. In five years, a family that paid $200 less each month on their home would have saved $12,000.
The National Center for Education Statistics says that amount of money is more than enough to pay for the average two years of community college tuition and fees.
Another important thing to think about is when the college costs are due. It takes a long time for a refinanced mortgage to save you money. There are some people who may not be able to wait five years because they have to go to college right away.
If you want to refinance in order to save money for college, make sure you have enough time to save the money you need before you or your child starts school.
Loans with interest rates that change or stay the same
Some lenders do not keep the interest rate the same for the whole loan term. This type of loan is used by some lenders. Its rate can change over time. This means that the mortgage interest rate can change over time based on how the market is doing.
Families may be able to get an adjustable-rate repayment loan from some lenders, but they should be aware that the interest on these loans can rise over time. The rate may be lower at first, but that might not stay the case. If interest rates go through the roof, homeowners may have to pay a lot more than they planned.
Recently, the Federal Reserve made it clear that it plans to raise interest rates to help bring down inflation. Families who want to refinance their mortgage to help pay for college should talk to a financial expert first. This is especially important before agreeing to a rate of interest that could change later and become more expensive over time.
Adding more time to pay back the mortgage
Getting a home mortgage with a longer loan term can lower monthly payments, which could then be used to pay for college. But there are some problems with this approach as well.
In the long run, it could mean that a family pays more interest on their mortgage, which, based on interest rates, might be more expensive than a student loan. Before you use this approach, find out how much extra interest you would earn.
Options Besides Refinancing Your Mortgage
To say it again, not everyone has a mortgage or can refinance one. It may be the best or only option for these people to get a student loan.
It’s also not a terrible choice. For first-year college students, the interest rate on direct government student loans, both subsidized and unsubsidized, is currently 3.73 percent. A lot of home loans have higher interest rates, which are especially bad for families whose credit is normal or below average.
Most of the time, the federal government has better terms and conditions for student loans than banks and other private lenders. Another good choice for families is a state-based, non-profit student loan organization. These groups usually offer student loans with clear and generous benefits.
In the end, every way to pay for college has pros and cons. If you don’t need a student loan, refinancing your mortgage might be a good choice. Families should take the time to find the best option for their needs.