Should You Use a Home Equity Line of Credit to Pay Off Student Loans?
In the past 10 years, student loans have surpassed auto loans as the largest source of household debt in the United States. The total outstanding debt nationwide is now $1.5 trillion, and each bachelor’s or master’s degree graduate contributes approximately $40,000 to that amount. While these expenses are becoming more and more overwhelming, people are looking closer at a home equity line of credit to pay off student loans. Could this be an option for you? Let’s take a closer look.
But… Aren’t Student Loans Good Debt?
People often call student loans “good debt.” That’s because there is a good possibility that your degree could improve your lifetime earnings by more than you paid to get the degree in the first place.
Unfortunately, student loans can easily go bad if you default, which is becoming increasingly common due to underemployment. More than 40 percent of graduates who accept their first jobs are currently underemployed, and that means that many of them are at risk of default. In the first quarter of 2018, more than 9 percent of borrowers defaulted.
Student Loans Linger
When you take out student loan debt, you have it for the rest of your life. You can’t even get rid of it by going into bankruptcy; it stays on your record until you manage to pay it back.
If you pay it on time, those payments can eventually help your credit score. Once you go into default, however, your credit score can start to plummet quickly. And if you go too long without repaying, the government can garnish your wages or even your Social Security checks. This is why many people consider using a home equity line of credit to pay off student loans.
Using a Home Equity Line of Credit to Pay Off Student Loans
When working to pay off student loans, a home equity line of credit may not be the first thought. Most people generally rely on their cash income. But your home equity is a potential solution for you.
Put simply, equity is the portion of your mortgage principal that you have repaid. You can also think of it as the percentage of your home’s value that you own, free and clear, without owing anything to the bank. If you borrow against it through a home equity line of credit, you can use the money to pay off your student loans.
How Do You Use a Home Equity Line of Credit to Pay off Student Loans?
A home equity line of credit, or HELOC, works similarly to a credit card. You get approved for a maximum amount that you can borrow against, and you can continue to borrow as long as you continue to pay it off on time. A lender may take out a HELOC worth up to 85 percent of your accumulated equity. If you’ve paid off enough of your mortgage, a home equity line of credit could let you pay off your student loans completely.
Watch out, though – the interest rate on your HELOC is variable and will likely shift with home loan interest rates. If interest rates rise, you could end up paying much more than you borrowed.
Another Option – The Lump-Sum Home Equity Loan to Pay Off Student Loans
The lump-sum loan works more like a traditional mortgage than a home equity line of credit; you simply take out a single amount and repay it in monthly installments. These types of loans tend to have fixed interest rates, so your interest rate will probably stay the same until it’s paid off.
The Risks of Using Home Equity to Pay off Student Loans
The idea of paying off your student loans is tempting, but be careful. Any time you get a home equity loan for student loans, whether you have a lump sum loan or a HELOC, you’re putting your property on the line as collateral. If you default, you could lose your home.
Also, if property values decline before you pay off your home equity loan or line of credit, you could owe more than the worth of the home. If that happens and you have to move, you could end up in foreclosure or forced to consider a short sale.
A Better Way – Sale-Leaseback
There is an option that lets you get access to your home equity to pay off student loans without taking on new debt, and it doesn’t involve having to move. It’s called a sale-leaseback, and it allows you to sell your home but remain in place as a tenant.
Through a sale-leaseback program, you sell your home to a sale-leaseback solution company, convert your home equity into cash and then remain as a renter. The rental term begins as soon as you sign the sale and lease contract so you can stay in your home throughout the process.
You can continue to pay rent until you’re ready to either re-purchase your home or move. If you decide to move, the compant can put your home on the market. You receive the difference between your equity payment and the sale value.
Why a Sale-Leaseback?
You could get your home equity and be able to pay off those student loans before the month is up.
Easy to Qualify
A sale-leaseback program isn’t a loan so there’s no loan application. You will not be asked for your household income and there’s no minimum credit score. A HELOC, by contrast, can require you to have a credit score of 700 or more and will need you to submit tax records.
Stay In Control
If you take out a home equity loan to pay off student loans and end up in default, the bank could take your home out from under you. With a sale-leaseback, you have the assurance that you can stay in place as long as you keep to the terms of the lease agreement. And if you do decide to move, you can weigh in on details like market price and real estate company.
Improved Credit Score
Your credit score takes a hit with any new loan that you take out, and that includes lump-sum home equity loans and HELOCs. When you use a sale-leaseback to convert home equity to pay off your student loans, you actually end up with fewer debt accounts. That’s good for your credit score and your borrower history.
Student loans often feel like financial traps, and taking on another loan to pay them off can seem like trading one financial leash for another. With a sale-leaseback program, you release yourself from a major debt. No more worrying about whether the government is going to come after you to get that money back – you’re not on the hook for it anymore.
If you’re looking to turn to a home equity line of credit to pay off your student loans, talk to your financial advisor to weigh your options.