Pay student loans via cash-out refinance?

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Topic Author
dtee
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Pay student loans via cash-out refinance?

Post by dtee » Thu Jul 11, 2019 1:16 pm

Hi Bogleheads community,
I want to ask for your input on this dilemma that my wife and I are going through. We have 2 babies currently at daycare. We maxed out our 401k at work and do backdoor Roth every year.

Background
Income: $12,000/month (take-home pay)
Expense: $10,000/month (include mortgage, student loans, daycare, etc..)
Primary Residence: value $650,000 with $365,000 mortgage at 3.75% (30 year fixed). Monthly mortgage is $1800/month in CA

Student Loans: $129,410 (total) - $3,000/month
His: $54,000 at 2.75% ($1500/month) - will pay off 9/2022
Her: $75,410 ($1,500/month) - breakdown below:
  • $5,500 at 4.250%
    $232 at 3.15%
    $1,662 at 3.15%
    $7,080 at 4.410%
    $12,230 at 4.040%
    $3,320 at 3.510%
    $42,000 at 4% - via family relative
We were toying around the idea of doing a cash-out refinance on our current house and use that money to get rid of our student loans and increase our monthly cash flow. Right now, we save about $1-2k/month after all expenses. We would like to increase our emergency fund and savings. We only have 1 month of emergency fund saved and about $15k in savings. We understand that loans must be paid regardless of whether it's student loans or mortgage, but the idea of paying $3,000/month every month for the next 4 years seem very daunting.

If we were to do cash-out refinance, this is the new number:
New mortgage: $483,500 at 3.875% (30 year fixed).
Monthly mortgage is $2,277/month
Cash out value: $116,000

We can afford to pay the new monthly mortgage. However, even with the cash-out, it's not even enough to cover all our student loans. We would still be short $13,410 which we could pay it off by end of this year.

Questions:
1) Should we do a cash-out refinance with our primary house? We plan to live in this house in the next 5-10 years so we're not planning to move anywhere, or Should we leave everything as is and continue to aggressively pay down our student loans.

2) What is the best strategy to tackle our student loan? We would like to pay it off as much as possible. We live very frugal in a HCOL area and live below our means.

What are your thoughts? We welcome all suggestions/comments. Thank you in advance for your recommendations. Thanks

artgerst
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Re: Pay student loans via cash-out refinance?

Post by artgerst » Thu Jul 11, 2019 2:14 pm

I'm sure you'll get some different advice here, but from what I read...

1) I'd stay the course. You are doing the right things and since you have been saving for 401k and Roth you could always dip into you home equity and even Roth contributions IF needed in an emergency. Your rates on debt seem good. For me, I would just focus on that happy day 4 years from now. 4 years is not that long if you are talking about paying off $130k.
2) If you get a bonus or some money back from the IRS then pay down some of it but otherwise, I would stay the course.

bloom2708
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Re: Pay student loans via cash-out refinance?

Post by bloom2708 » Thu Jul 11, 2019 2:19 pm

I would probably do the cash out refinance.

You still have good home equity. Is that the best rate right now with rates falling? I would look at a 10/1 ARM and see if you can get below your current 3.7%.

You could "snowball" the loans, but with a tight income margin, it will likely take 2+ years to pay them off or more even with laser focus. You pay minimums on all except the smallest. Then when the smallest is paid off, that payment goes to the next smallest.

Getting down to $13k would be a win and then pay that balance off as fast as possible. I'ld probably use $5k to $7k of the Savings too. Then when paid, all excess goes to Emergency Funds until ~6 months.

I don't see much downside other than the rate is higher than you currently pay and whatever the fees are. I would rather owe on my mortgage than owe a relative.

Good luck!
Last edited by bloom2708 on Thu Jul 11, 2019 2:42 pm, edited 1 time in total.
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mhadden1
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Re: Pay student loans via cash-out refinance?

Post by mhadden1 » Thu Jul 11, 2019 2:32 pm

I don't see how it helps you much to trade your student debt for debt secured by your house. If you really get in a tight spot maybe the family member will work with you a little on that loan. Otherwise I would keep paying the loans down, and use any windfall for that purpose. Happily, as time goes by, you are likely to get raises and bonuses, and the children will no longer need as much daycare, so things are likely to loosen up for you naturally.

Good luck!
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MichCPA
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Re: Pay student loans via cash-out refinance?

Post by MichCPA » Thu Jul 11, 2019 2:34 pm

Since the mortgage rate is higher than most of the student loans, all a refi would do is stretch the term out. If some of these loans are private, you might look into stretching the term through a student loan refi rather than a housing refi. You could target the higher rate loans and avoid all of the refinancing costs of a new mortgage (which are effectively interest expense).

hightower
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Re: Pay student loans via cash-out refinance?

Post by hightower » Thu Jul 11, 2019 3:24 pm

I haven't read the rest of the responses yet, but in my mind, this is generally an ok move...especially for someone like you with a lot of equity in a property.
Student loan debt is debt that will follow you everywhere you go, even through bankruptcy...Mortgage debt is the exact opposite. It is tied to your house and nothing else (though some states allow for recourse action by the mortgage company if you default). Student loan debt is also not tax deductible for high income earners. Mortgage debt is.

FWIW, I refinanced my home a few years ago and did a cash out refinance and used the cash to get rid of about 60k of high interest student loans. I don't regret it one bit because it freed up some cash flow and allowed me to get rid of the rest of my loans sooner. We had a lot of equity because we paid for a lot of home renovations on our primary residence with cash causing our home value to go up significantly, so basically we ended up in the same place we would have been if I had paid off my student loans instead and purchased a similar priced house later. Does that make sense?

I would do it again, but we're about to sell our house and I plan on using the proceeds to pay off my last loan anyway.

If it were me in your shoes...I'd do it. That's a great way to get rid of a bad debt quickly. I'd much rather have a bigger mortgage and no other debt, then a slightly smaller mortgage and lot's of student debt.
Last edited by hightower on Thu Jul 11, 2019 3:28 pm, edited 1 time in total.

Topic Author
dtee
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Joined: Fri Nov 11, 2016 4:48 pm

Re: Pay student loans via cash-out refinance?

Post by dtee » Thu Jul 11, 2019 3:24 pm

MichCPA wrote:
Thu Jul 11, 2019 2:34 pm
Since the mortgage rate is higher than most of the student loans, all a refi would do is stretch the term out. If some of these loans are private, you might look into stretching the term through a student loan refi rather than a housing refi. You could target the higher rate loans and avoid all of the refinancing costs of a new mortgage (which are effectively interest expense).
Correct. All I'm doing with the cash out refinance is to stretch out the loan. My loan is currently private and was refinanced 4 years ago to get it to 2.75%. As for my wife, the $34k is with Great Lakes (ranging from 3-4%). We could look at refinancing that student loan to lower its rate. I haven't look at that possibility yet, but that's a good idea.

Topic Author
dtee
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Joined: Fri Nov 11, 2016 4:48 pm

Re: Pay student loans via cash-out refinance?

Post by dtee » Thu Jul 11, 2019 3:33 pm

hightower wrote:
Thu Jul 11, 2019 3:24 pm
I haven't read the rest of the responses yet, but in my mind, this is generally an ok move...especially for someone like you with a lot of equity in a property.
Student loan debt is debt that will follow you everywhere you go, even through bankruptcy...Mortgage debt is the exact opposite. It is tied to your house and nothing else (though some states allow for recourse action by the mortgage company if you default). Student loan debt is also not tax deductible for high income earners. Mortgage debt is.

FWIW, I refinanced my home a few years ago and did a cash out refinance and used the cash to get rid of about 60k of high interest student loans. I don't regret it one bit because it freed up some cash flow and allowed me to get rid of the rest of my loans sooner. We had a lot of equity because we paid for a lot of home renovations on our primary residence with cash causing our home value to go up significantly, so basically we ended up in the same place we would have been if I had paid of my student loans instead and purchased a similar priced house later. Does that make sense?

I would do it again, but we're about to sell our house and I plan on using the proceeds to pay off my last loan anyway.
I had the same thoughts and ideas as you when we first came up with this idea. The main goal of doing this cash out refinance is to increase our cash flow. Most of our money is tight up to the student loans each month.

I was a bit hesitant to move forward because I found out that with the new Tax Cuts and Jobs Act of 2017, the interest is no longer deductible since the money is to be used on home equity indebtedness. Also, I was thinking that since all these student loans are low (2-4%), there wasn't a big advantage whether I should do it or not. So that's why I'm on the fence about this

Topic Author
dtee
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Joined: Fri Nov 11, 2016 4:48 pm

Re: Pay student loans via cash-out refinance?

Post by dtee » Thu Jul 11, 2019 3:37 pm

bloom2708 wrote:
Thu Jul 11, 2019 2:19 pm
I would probably do the cash out refinance.

You still have good home equity. Is that the best rate right now with rates falling? I would look at a 10/1 ARM and see if you can get below your current 3.7%.
Good idea. I haven't look at the rate for 10/1 ARM. Although I have heard that the Fed is planning to cut the interest rate sometime this month, I'm hoping that the new loan can at least be at same rate or lower than what I have right now which is 3.75%.

Topic Author
dtee
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Re: Pay student loans via cash-out refinance?

Post by dtee » Thu Jul 11, 2019 3:39 pm

mhadden1 wrote:
Thu Jul 11, 2019 2:32 pm
I don't see how it helps you much to trade your student debt for debt secured by your house. If you really get in a tight spot maybe the family member will work with you a little on that loan. Otherwise I would keep paying the loans down, and use any windfall for that purpose. Happily, as time goes by, you are likely to get raises and bonuses, and the children will no longer need as much daycare, so things are likely to loosen up for you naturally.

Good luck!
It's mainly for cash flow. I understand that loans must be paid back, but the idea is that instead of me spending $3000/month for student loans, we just pay additional $500/month towards our new mortgage, which will be $2277.

Chadnudj
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Re: Pay student loans via cash-out refinance?

Post by Chadnudj » Thu Jul 11, 2019 3:58 pm

I'd veto this idea, for a number of reasons.

1. In the event of a catastrophic emergency (you/your spouse lose your jobs simultaneously), student loan obligations can be deferred. Not so much your mortgage. And if both of your jobs are safe, you should be able to continue on this path without the need of a much larger emergency fund.

2. You're making your mortgage interest rate worse and making the term of your mortgage longer to pay down (relatively) low interest debt that you have no problem paying right now (as you're still saving $1k-$2k per month ON TOP of maxing out all retirement accounts). That seems ill advised.

3. I get the cash flow crunch (trust me -- I'm in the same boat with two kids in daycare, etc.)...but it's temporary. Your kids will get older (which reduces daycare costs even if they're still in daycare -- you pay less for a 4 year old than you do a 2 year old, etc.), you'll get raises, and the loans will be paid off. Your current path seems doable (if a bit tighter than you'd like) for another 4 years, at which point you'll be thrilled to be done with student loans AND have more equity in your house.

4. As someone else noted, you could (maybe) free up some cash flow by snowballing the loans to knock a few out (thereby eliminating the minimum payments there), or even tap your savings in whole or in part to free up a bit more cash flow. One month of your $1k-$2k extra in savings based on your budget would get rid of your wife's $232 and $1662 loans, for instance; another 2 months of your extra in savings would get rid of her $3,3320 loan, etc. Or you could tap the $15k in savings to knock out almost all of her loans other than the $42k relative/$12,230 at 4.04% (and rely on your Roth contributions as an "emergency fund" on top of your emergency fund if you need it).

I'd stick to the plan, and avoid adding years on to your mortgage/getting a higher mortgage rate and balance.

milktoast
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Re: Pay student loans via cash-out refinance?

Post by milktoast » Thu Jul 11, 2019 4:12 pm

I wouldn't do it. Snowball it instead even if it means slowing your savings down to only $500/month.

If you do refinance, try to get a better rate via a 7/1 or something. Pay off hers, keep his. Most of her loans are at higher rate than mortgage and his is a full percent lower. Increases cashflow by $1000 rather than by $2500. And in only 3 years, you get that extra $1500 cashflow to drive that mortgage down to take the risk out of a 7/1.

This holds your lifestyle increase in check and avoids refinancing his debt at higher interest rate over longer period of time.

mhalley
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Re: Pay student loans via cash-out refinance?

Post by mhalley » Thu Jul 11, 2019 5:39 pm

If the loans had a 6% interest rate I could see it, but I agree that snowballing the loans is preferable to changing unsecured debt to secured by your house.

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Watty
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Re: Pay student loans via cash-out refinance?

Post by Watty » Thu Jul 11, 2019 5:49 pm

You did not mention the refinance costs. What are they and what is the APR on the new mortgage?

I would really hate to pay the refinance costs and have a higher interest rate for the next 30 years just to improve your cash flow.

What is your situation with cars? If you are driving expensive cars then selling them and driving cheap cars would also be an option to consider.
dtee wrote:
Thu Jul 11, 2019 1:16 pm
We maxed out our 401k at work and do backdoor Roth every year.
That would be about $50K when I would guess that your gross income might be something like $160K or so.

That is too aggressive at this stage of life so I would cut out the back door Roth since that could free up $12,000 a year in cash flow.

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grabiner
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Re: Pay student loans via cash-out refinance?

Post by grabiner » Thu Jul 11, 2019 5:56 pm

dtee wrote:
Thu Jul 11, 2019 1:16 pm
Primary Residence: value $650,000 with $365,000 mortgage at 3.75% (30 year fixed). Monthly mortgage is $1800/month in CA

If we were to do cash-out refinance, this is the new number:
New mortgage: $483,500 at 3.875% (30 year fixed).
Monthly mortgage is $2,277/month
Cash out value: $116,000
Effectively, you are paying the old 3/4 of the mortgage at 3.75%, and paying the other 1/4 at 4.25%, so you are increasing the loan rates. In addition, the cash-out portion of the mortgage is not tax deductible even if you itemize deductions; the student loan interest is mostly deductible.

Since you would free up cash flow anyway, can you refinance to a 15-year loan at a lower rate? That would make the refinancing a better deal, although you would still need to compare interest rates.
Wiki David Grabiner

KlangFool
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Re: Pay student loans via cash-out refinance?

Post by KlangFool » Thu Jul 11, 2019 6:04 pm

Chadnudj wrote:
Thu Jul 11, 2019 3:58 pm
I'd veto this idea, for a number of reasons.

1. In the event of a catastrophic emergency (you/your spouse lose your jobs simultaneously), student loan obligations can be deferred. Not so much your mortgage. And if both of your jobs are safe, you should be able to continue on this path without the need of a much larger emergency fund.
Chadnudj,

I disagreed. California is a non-recourse loan state. They can just walk away from the house if they need to. Meanwhile, they cannot get rid of the student loan under any circumstances.

KlangFool

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Re: Pay student loans via cash-out refinance?

Post by KlangFool » Thu Jul 11, 2019 6:07 pm

OP,

This may not be one of your consideration. But, you are exchanging student loan that you cannot get rid off in bankruptcy into a non-recourse mortgage loan that you can walk away.

KlangFool

SovereignInvestor
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Re: Pay student loans via cash-out refinance?

Post by SovereignInvestor » Thu Jul 11, 2019 6:11 pm

dtee wrote:
Thu Jul 11, 2019 3:37 pm
bloom2708 wrote:
Thu Jul 11, 2019 2:19 pm
I would probably do the cash out refinance.

You still have good home equity. Is that the best rate right now with rates falling? I would look at a 10/1 ARM and see if you can get below your current 3.7%.
Good idea. I haven't look at the rate for 10/1 ARM. Although I have heard that the Fed is planning to cut the interest rate sometime this month, I'm hoping that the new loan can at least be at same rate or lower than what I have right now which is 3.75%.
The longer term mortgage rates follow market not the fed. The market futures price in 3-4 cuts in the fed funds rate through next April so if for some reason thy don't cut it is probable market long term rates may spike since they priced in a lot.

Not sure what's available in CA...but in NY there are lenders giving 10/1 ARM as low as 2.625%. Just locked a 7/1 ARM at 2.375% yesterday.

TropikThunder
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Re: Pay student loans via cash-out refinance?

Post by TropikThunder » Thu Jul 11, 2019 7:05 pm

KlangFool wrote:
Thu Jul 11, 2019 6:04 pm
Chadnudj wrote:
Thu Jul 11, 2019 3:58 pm
I'd veto this idea, for a number of reasons.

1. In the event of a catastrophic emergency (you/your spouse lose your jobs simultaneously), student loan obligations can be deferred. Not so much your mortgage. And if both of your jobs are safe, you should be able to continue on this path without the need of a much larger emergency fund.
Chadnudj,

I disagreed. California is a non-recourse loan state. They can just walk away from the house if they need to. Meanwhile, they cannot get rid of the student loan under any circumstances.

KlangFool
He didn't say the student loans could be "gotten rid of", he said the payments could be deferred in case of economic hardship. Will your mortgage lender let you skip payments for 6 months if you lose your job?

KlangFool
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Re: Pay student loans via cash-out refinance?

Post by KlangFool » Thu Jul 11, 2019 7:26 pm

TropikThunder wrote:
Thu Jul 11, 2019 7:05 pm
KlangFool wrote:
Thu Jul 11, 2019 6:04 pm
Chadnudj wrote:
Thu Jul 11, 2019 3:58 pm
I'd veto this idea, for a number of reasons.

1. In the event of a catastrophic emergency (you/your spouse lose your jobs simultaneously), student loan obligations can be deferred. Not so much your mortgage. And if both of your jobs are safe, you should be able to continue on this path without the need of a much larger emergency fund.
Chadnudj,

I disagreed. California is a non-recourse loan state. They can just walk away from the house if they need to. Meanwhile, they cannot get rid of the student loan under any circumstances.

KlangFool
He didn't say the student loans could be "gotten rid of", he said the payments could be deferred in case of economic hardship. Will your mortgage lender let you skip payments for 6 months if you lose your job?
TropikThunder,

1) How long does it take for the mortgage lender to foreclose a house?

2) For a non-recourse mortgage loan, if a person is in economic hardship, not paying the mortgage may be a viable option. Especially if the house is underwater.

<<he said the payments could be deferred in case of economic hardship.>>

3) Deferred payment does not necessarily mean you do not pay interest on the loan. It just makes the loan bigger.

KlangFool

Gibby45
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Re: Pay student loans via cash-out refinance?

Post by Gibby45 » Thu Jul 11, 2019 7:37 pm

My vote would be to NOT do the cash out refi. His student loan debt will be gone in about 3 years. That will free up $1,500 which would allow you to double the ammo going to your student loan payments. Day care should go away or drop when the child(ren) start (pre)school. You could likely eliminate a few of the smaller balance loans for the cost of the refi. The student loans are at good rates. There is no point in taking 30 years to pay them off when half the payments go away in three years.

softwaregeek
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Re: Pay student loans via cash-out refinance?

Post by softwaregeek » Thu Jul 11, 2019 7:51 pm

I certainly wouldn't refi his debt. But I believe he can deduct the mortgage interest even on a cash out. Plus, student loans are basically non dischargeable. I would much rather have the mortgage than the student loan.

I would take an ARM, possibly cashing out a little bit to reduce the highest income loans. Then snowball down the rest of it with the extra cash flow.

TropikThunder
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Re: Pay student loans via cash-out refinance?

Post by TropikThunder » Thu Jul 11, 2019 8:27 pm

KlangFool wrote:
Thu Jul 11, 2019 7:26 pm
TropikThunder,

1) How long does it take for the mortgage lender to foreclose a house?

2) For a non-recourse mortgage loan, if a person is in economic hardship, not paying the mortgage may be a viable option. Especially if the house is underwater.

<<he said the payments could be deferred in case of economic hardship.>>

3) Deferred payment does not necessarily mean you do not pay interest on the loan. It just makes the loan bigger.

KlangFool
Call me crazy, but I think capitalizing a few months loan interest is a slightly better option than defaulting on a mortgage.

KlangFool
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Re: Pay student loans via cash-out refinance?

Post by KlangFool » Thu Jul 11, 2019 8:34 pm

TropikThunder wrote:
Thu Jul 11, 2019 8:27 pm
KlangFool wrote:
Thu Jul 11, 2019 7:26 pm
TropikThunder,

1) How long does it take for the mortgage lender to foreclose a house?

2) For a non-recourse mortgage loan, if a person is in economic hardship, not paying the mortgage may be a viable option. Especially if the house is underwater.

<<he said the payments could be deferred in case of economic hardship.>>

3) Deferred payment does not necessarily mean you do not pay interest on the loan. It just makes the loan bigger.

KlangFool
Call me crazy, but I think capitalizing a few months loan interest is a slightly better option than defaulting on a mortgage.
TropikThunder,

1) What if it is not a few months? Then what?

2) That kind of situations tends to occur in a recession. At that kind of situation, refinancing and cash out the mortgage is no longer an option.

3) With both student loans and the house mortgage, in the worst condition, a person will lose the house and the student loan will get bigger and never go away.

4) With a non-recourse mortgage, in the worst situation, the person can walk away from the house and start fresh.

Is (3) or (4) preferable?

KlangFool

Chadnudj
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Re: Pay student loans via cash-out refinance?

Post by Chadnudj » Fri Jul 12, 2019 9:20 am

KlangFool wrote:
Thu Jul 11, 2019 8:34 pm

TropikThunder,

1) What if it is not a few months? Then what?

2) That kind of situations tends to occur in a recession. At that kind of situation, refinancing and cash out the mortgage is no longer an option.

3) With both student loans and the house mortgage, in the worst condition, a person will lose the house and the student loan will get bigger and never go away.

4) With a non-recourse mortgage, in the worst situation, the person can walk away from the house and start fresh.

Is (3) or (4) preferable?

KlangFool
You have two employed adults (presumably for different employers), both entitled to unemployment benefits (presumably), both (likely but not certain) to get some type of severance package, both (given their income) relatively educated/skilled and thus likely to obtain employment again quickly. We have no indication regarding the relative safety/security of their employment.

You also have daycare expenses that could be/would be eliminated/reduced if one/both lost their jobs (if you both lose your jobs, you don't need to send your kids to daycare anymore since at least one of you can be home with the kids). And you have Roth IRA contributions to add to your emergency funds/savings to stretch them farther.

I wouldn't reduce the equity I've obtained in my house (something I need for shelter) to improve my cash flow in order to pay off low interest rate student loans now rather than gradually over 4 years.

And you're ignoring possibility (5) -- you do a cash out refinance now to pay off these low-interest, deferable-in-an-emergency student loans, a major recession hits, you both lose your jobs AND housing values in your area plummet. Now you can't afford your house, you try to sell it and get nothing for it (since you got rid of the equity to accelerate your student loan payments by 4 years), or, even worse, you can't make house payments and your house if foreclosed upon, and when it sells at foreclosure there is still nothing left for you once the balance/penalties are paid to the bank. Sure, you have no student loans....but you lost all the equity you put in your house, have no place to live, and you're in that situation for what?

To improve your already sufficient cash flow (remember, they have $1k-$2k extra every month right now, still) and pay off your low-interest student loans now rather than gradually over 4 years?

(And, not to get into a political discussion whatsoever, all of THAT ignores the non-zero possibility of legislation providing for student loan forgiveness/amnesty, etc. to come out during the 4 years OP is paying them off)

KlangFool
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Re: Pay student loans via cash-out refinance?

Post by KlangFool » Fri Jul 12, 2019 9:38 am

Chadnudj wrote:
Fri Jul 12, 2019 9:20 am
KlangFool wrote:
Thu Jul 11, 2019 8:34 pm

TropikThunder,

1) What if it is not a few months? Then what?

2) That kind of situations tends to occur in a recession. At that kind of situation, refinancing and cash out the mortgage is no longer an option.

3) With both student loans and the house mortgage, in the worst condition, a person will lose the house and the student loan will get bigger and never go away.

4) With a non-recourse mortgage, in the worst situation, the person can walk away from the house and start fresh.

Is (3) or (4) preferable?

KlangFool
You have two employed adults (presumably for different employers), both entitled to unemployment benefits (presumably), both (likely but not certain) to get some type of severance package, both (given their income) relatively educated/skilled and thus likely to obtain employment again quickly. We have no indication regarding the relative safety/security of their employment.
Chadnudj,

1) In a recession, dual-income could disappear quickly.

2) At OP's income and expense level, unemployment benefit is not big enough to matter.

3) In the worst case, somebody that could walk away from the house and move elsewhere has a better chance to find a new job in a new location.

4) By cashing out the home equity and paying off the student loan, there are less home equity to lose when OP walk away from the house.

In summary, in the worst case, not having a student loan is a great thing. Your disagreement with me is that you do not believe that the worst case is possible.

Hope for the best. Plan for the worst is my philosophy. Be prepared. The worst may never happen. But, if you are prepared, the worst would not be as disastrous.

<< To improve your already sufficient cash flow (remember, they have $1k-$2k extra every month right now, still) and pay off your low-interest student loans now rather than gradually over 4 years?>>

The last recession was 2008/2009. About 10+ years ago, I believe that it is overly optimistic to believe that we will not have a recession over the next 4 years.

KlangFool

smitcat
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Re: Pay student loans via cash-out refinance?

Post by smitcat » Fri Jul 12, 2019 9:52 am

KlangFool wrote:
Fri Jul 12, 2019 9:38 am
Chadnudj wrote:
Fri Jul 12, 2019 9:20 am
KlangFool wrote:
Thu Jul 11, 2019 8:34 pm

TropikThunder,

1) What if it is not a few months? Then what?

2) That kind of situations tends to occur in a recession. At that kind of situation, refinancing and cash out the mortgage is no longer an option.

3) With both student loans and the house mortgage, in the worst condition, a person will lose the house and the student loan will get bigger and never go away.

4) With a non-recourse mortgage, in the worst situation, the person can walk away from the house and start fresh.

Is (3) or (4) preferable?

KlangFool
You have two employed adults (presumably for different employers), both entitled to unemployment benefits (presumably), both (likely but not certain) to get some type of severance package, both (given their income) relatively educated/skilled and thus likely to obtain employment again quickly. We have no indication regarding the relative safety/security of their employment.
Chadnudj,

1) In a recession, dual-income could disappear quickly.

2) At OP's income and expense level, unemployment benefit is not big enough to matter.

3) In the worst case, somebody that could walk away from the house and move elsewhere has a better chance to find a new job in a new location.

4) By cashing out the home equity and paying off the student loan, there are less home equity to lose when OP walk away from the house.

In summary, in the worst case, not having a student loan is a great thing. Your disagreement with me is that you do not believe that the worst case is possible.

Hope for the best. Plan for the worst is my philosophy. Be prepared. The worst may never happen. But, if you are prepared, the worst would not be as disastrous.

<< To improve your already sufficient cash flow (remember, they have $1k-$2k extra every month right now, still) and pay off your low-interest student loans now rather than gradually over 4 years?>>

The last recession was 2008/2009. About 10+ years ago, I believe that it is overly optimistic to believe that we will not have a recession over the next 4 years.

KlangFool

I agree with Klang on this one 100% - we have seen these scenarios play out over time.
YMMV

Herekittykitty
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Re: Pay student loans via cash-out refinance?

Post by Herekittykitty » Fri Jul 12, 2019 10:12 am

With $12,00 income - $10,000 expenses = $2,000.

Does the $10,000 expense figure include all non-discretionary expenses? If so, I don't see a cash flow deficit. I see a cash flow surplus. $1,000 a month of which could go to paying down the student loans to get them paid off even faster than the few years it will take at the rate of pay off in the original post and with $1,000 a month discretionary income. In fact, maybe $1,500 could go toward student loans with $500 discretionary income to spend however the couple decide. The student loans will be gone in the blink of an eye compared to the rest of your lives if you do this, and in a few blinks if you continue at your current pace.

Regarding the private loan: If it is from family I would consider refinancing into a loan that did not involve them, but that is not really a financial decision. As to whether refinancing makes good financial and/or risk reduction sense, I defer that input to others. Except I wouldn't take money out of the refinance and use it for student loans or anything else.

Caveat: My opinion may be based in part on dislike of student loans, which affects my objectivity.

Edited to fix a sentence structure.
Last edited by Herekittykitty on Fri Jul 12, 2019 12:57 pm, edited 1 time in total.
I don't know anything.

MichCPA
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Re: Pay student loans via cash-out refinance?

Post by MichCPA » Fri Jul 12, 2019 10:18 am

mhalley wrote:
Thu Jul 11, 2019 5:39 pm
If the loans had a 6% interest rate I could see it, but I agree that snowballing the loans is preferable to changing unsecured debt to secured by your house.
I agree with the general concept of your post, but I would like to point out that student loans aren't bankrupt-able so, in practical terms, they are secured by your future income stream.

robphoto
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Re: Pay student loans via cash-out refinance?

Post by robphoto » Fri Jul 12, 2019 10:41 am

One other point from our experience: if you can do a 15 year mortgage, you will be clear of the mortgage when the kids are in college, so it's much easier to cash flow tuition or other college expenses then.

KlangFool
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Re: Pay student loans via cash-out refinance?

Post by KlangFool » Fri Jul 12, 2019 11:25 am

robphoto wrote:
Fri Jul 12, 2019 10:41 am
One other point from our experience: if you can do a 15 year mortgage, you will be clear of the mortgage when the kids are in college, so it's much easier to cash flow tuition or other college expenses then.
robphoto,

1) But, if OP does not have the money to "cash flow" college expense, OP would have to take a more expensive student loan at that time. With the low-interest rate now, 30 years mortgage looks like a very good deal.

2) I "cash flow" my kids' college education with a mortgage. It is not necessary to pay off the mortgage.

KlangFool

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Nate79
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Re: Pay student loans via cash-out refinance?

Post by Nate79 » Fri Jul 12, 2019 11:53 am

I would just put a note of caution that relying on non recourse mortgage is dangerous. In many states these laws are complicated (just because the state may be non recourse isn't always a blanket statement) and the exact terms and laws have changed with time. This may not apply in CA but was true in OR and other states.

Loik098
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Re: Pay student loans via cash-out refinance?

Post by Loik098 » Fri Jul 12, 2019 3:43 pm

robphoto wrote:
Fri Jul 12, 2019 10:41 am
One other point from our experience: if you can do a 15 year mortgage, you will be clear of the mortgage when the kids are in college, so it's much easier to cash flow tuition or other college expenses then.
I see quite a few mentions in this thread of 15-year and 30-year timelines to pay off a refinance.

With the behavior trends what they are today, should this even be a part of the math? I suppose some do find their "forever home" early on, but I'd be certain to ask whether the couple sees themselves in same home for 15 or 30 more years.

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dtee
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Re: Pay student loans via cash-out refinance?

Post by dtee » Fri Jul 12, 2019 3:44 pm

Thank you for all the response. I hear a lot of great inputs from this discussion and I'll keep that in mind. Just want to provide additional details based on the postings.
-We both work in healthcare, so our employment/job is secured.
-$1,500 of His student loan is required because I refinanced it several years ago to get it down to the low interest rate.
-Her student loans is set on auto-payment at $500/month, but we're aggressively paying additional $1000/month to attack the high interest rate first


Another option that my friend told me to consider is this. Do the cash-out refinance and use that money to build an Accessory Dwelling Unit (ADU). Yes the monthly mortgage will still be at $2,277/month. It will cost about $100k to build a detached ADU, and it will take about 6-8 months til completion. Of course the cost of construction is an estimate, but this was quoted to us from the builder. We live in a highly desirable area, so rent is not issue. Rent for a 2bd/2bath is around $2000/month.

Given that scenario from above, there were a couple of pros/cons:

Pros:
1. increase equity in our home
2. will generate additional monthly income once the ADU is completed. Income could be used to speed up the payment on student loans. Then we could live free (well we still have to pay the ($2,277 - $2,000 = $277 difference).
3. take advantage of the current low interest rate to do a cash-out refinance

Cons:
1. will reduce our monthly savings (at most I think we could save around $1000/month)
2. put a strain on our budget during the construction of the ADU because who knows what expense could come up
3. potentially delay the length of Her student loans since we may not aggressively pay the additional $1,000

Are there any other pros/cons that you could think of? I know using the cash-out refinance to build an ADU may not be Boglehead-ish while I'm in this position. Any thoughts on this idea that my friend suggested? Thank you again for all the comments/discussion. You guys have all been really helpful!

MichCPA
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Re: Pay student loans via cash-out refinance?

Post by MichCPA » Fri Jul 12, 2019 4:07 pm

Loik098 wrote:
Fri Jul 12, 2019 3:43 pm
robphoto wrote:
Fri Jul 12, 2019 10:41 am
One other point from our experience: if you can do a 15 year mortgage, you will be clear of the mortgage when the kids are in college, so it's much easier to cash flow tuition or other college expenses then.
I see quite a few mentions in this thread of 15-year and 30-year timelines to pay off a refinance.

With the behavior trends what they are today, should this even be a part of the math? I suppose some do find their "forever home" early on, but I'd be certain to ask whether the couple sees themselves in same home for 15 or 30 more years.
IMO, you should just be comparing the interest cost of 30 yr paid in 15 vs 15 required and determining whether the additional interest is worth the flexibility. For each 1/2% of 100k mortgage, you only pay about 4,500 over 15 yrs.

So on 300k, that is $900 per year of extra interest so you can reduce the minimum monthly payment by about $700 per month.

Sounds like a good deal if you have any space left in tax advantaged accounts.

JGoneRiding
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Re: Pay student loans via cash-out refinance?

Post by JGoneRiding » Sat Jul 13, 2019 4:27 pm

So I personally haven't done it for the simple reason I can't stomach taking 15 yr debt and recasting it as 30 yr debt. Plus the interest rates where always to close to make sense to do it from a rate reduction idea.

JGoneRiding
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Re: Pay student loans via cash-out refinance?

Post by JGoneRiding » Sat Jul 13, 2019 9:24 pm

KlangFool wrote:
Thu Jul 11, 2019 6:07 pm
OP,

This may not be one of your consideration. But, you are exchanging student loan that you cannot get rid off in bankruptcy into a non-recourse mortgage loan that you can walk away.

KlangFool
The primary mortgage is non recourse but I believe once you do a cash out refi it becomes recourse or at least that portion does.

JGoneRiding
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Re: Pay student loans via cash-out refinance?

Post by JGoneRiding » Sat Jul 13, 2019 9:29 pm

dtee wrote:
Fri Jul 12, 2019 3:44 pm
Thank you for all the response. I hear a lot of great inputs from this discussion and I'll keep that in mind. Just want to provide additional details based on the postings.
-We both work in healthcare, so our employment/job is secured.
-$1,500 of His student loan is required because I refinanced it several years ago to get it down to the low interest rate.
-Her student loans is set on auto-payment at $500/month, but we're aggressively paying additional $1000/month to attack the high interest rate first

Ok stop with the refi talk then! Your whole excuse was to improve cash flow. You dont have a cash flow issue you have a mental issue.

You can stop the extra payment, you can stop the backdoor Roth, you can decrease retirement savings, you can decrease general post other saving. You are creating an issue where there is none. Just pay the loans and soon they will be gone. Refi and you are stuck with them for a super long time!

The goal is financial security not to say you don't have any sl

milktoast
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Re: Pay student loans via cash-out refinance?

Post by milktoast » Sun Jul 14, 2019 11:14 am

dtee wrote:
Fri Jul 12, 2019 3:44 pm

-We both work in healthcare, so our employment/job is secured.
-$1,500 of His student loan is required because I refinanced it several years ago to get it down to the low interest rate.
-Her student loans is set on auto-payment at $500/month, but we're aggressively paying additional $1000/month to attack the high interest rate first
Leave the house and the mortgage alone.

You don't have a cash flow problem. You are worried that you may have a cash flow problem. Emotions are real and that's ok.

So right now you have $1000/mo flexibility in cash flow. Snow balling can increase that flexibility at a slight cost in interest charges.

Just switch to paying against the lowest balance rather than the highest interest rate loans. Each time you pay one off (and two of them could be paid off by the end of summer) you gain that minimum payment on top of your $1000/mo as additional cash flow flexibility.

You can either add it to your spend or add it to paying down the next loan. Just try that for a year and see how you feel. By then, you'll only be two years away from paying off his loans and with an extra $1500/mo in cash flow flexibility you'll be golden.

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scubadiver
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Re: Pay student loans via cash-out refinance?

Post by scubadiver » Sun Jul 14, 2019 7:37 pm

milktoast wrote:
Sun Jul 14, 2019 11:14 am
Leave the house and the mortgage alone.

You don't have a cash flow problem. You are worried that you may have a cash flow problem. Emotions are real and that's ok.

So right now you have $1000/mo flexibility in cash flow. Snow balling can increase that flexibility at a slight cost in interest charges.

Just switch to paying against the lowest balance rather than the highest interest rate loans. Each time you pay one off (and two of them could be paid off by the end of summer) you gain that minimum payment on top of your $1000/mo as additional cash flow flexibility.

You can either add it to your spend or add it to paying down the next loan. Just try that for a year and see how you feel. By then, you'll only be two years away from paying off his loans and with an extra $1500/mo in cash flow flexibility you'll be golden.
This is a very sensible way forward.

The OP does NOT have a cash flow issue unless we expand the definition of cash flow issue that include saving $50K per year for retirement, overpaying on loans to the tune of $1K per month and only having $1K per month left for additional savings. Indeed, the OP's cash flow flexibility exceeds the median US household income, with margin.

Chadnudj
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Re: Pay student loans via cash-out refinance?

Post by Chadnudj » Mon Jul 15, 2019 9:08 am

milktoast wrote:
Sun Jul 14, 2019 11:14 am
dtee wrote:
Fri Jul 12, 2019 3:44 pm

-We both work in healthcare, so our employment/job is secured.
-$1,500 of His student loan is required because I refinanced it several years ago to get it down to the low interest rate.
-Her student loans is set on auto-payment at $500/month, but we're aggressively paying additional $1000/month to attack the high interest rate first
Leave the house and the mortgage alone.

You don't have a cash flow problem. You are worried that you may have a cash flow problem. Emotions are real and that's ok.

So right now you have $1000/mo flexibility in cash flow. Snow balling can increase that flexibility at a slight cost in interest charges.

Just switch to paying against the lowest balance rather than the highest interest rate loans. Each time you pay one off (and two of them could be paid off by the end of summer) you gain that minimum payment on top of your $1000/mo as additional cash flow flexibility.

You can either add it to your spend or add it to paying down the next loan. Just try that for a year and see how you feel. By then, you'll only be two years away from paying off his loans and with an extra $1500/mo in cash flow flexibility you'll be golden.
Exactly this. No need to take equity out of your house/burden your mortgage to pay off the student loans faster when they're already on a 4 year payoff timeline that might itself be accelerated by dedicating that $1-$2k extra per month towards paying them off, particularly when you're already saving significantly large (appropriately!) amounts towards retirement and with stable jobs in a stable field (per OP's response).

I'd also avoid/really carefully consider the ADU -- that's a lot of cost/expense and risk (what if you get a terrible tenant? Do you really want someone living that close to you? Will an ADU make it harder to sell your property? Are you close enough to transit/large city with significant rental demand to make an ADU vacancy-proof/profitable?). Not saying it's a bad idea if you like the answer to all those factors/really run the numbers, but you should really be cautious.

Also, I'd bet if you were really bottom-line focused, you could find some fat to cut in your budget (even temporarily) that would help you payoff the loans faster (particularly when paired with a smart snowball/debt avalanche approach).

alfaspider
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Re: Pay student loans via cash-out refinance?

Post by alfaspider » Mon Jul 15, 2019 9:34 am

For OP, I'm not sure this makes sense due to relatively secure income streams, low rates, and short time frame, but it can for many.

Keep in mind that many student loans are at relatively high rates (mine were at 6.8%). You can do private refinancing, but then you loose the protections against income loss (income based repayment options, forbearance). Student loans are particularly toxic in that they can't be discharged in bankruptcy, so income loss can result in your debts ballooning from interest/penalties, and can result in lifetime debt for some unfortunate few.

Mortgage debt, on the other hand, is typically non-recourse, or if it is recourse, is still bankruptcy dischargeable. Additionally, if you are itemizing deductions, the interest may be deductible. The student loan interest deduction is quite limited, and most medium to high income folks can't take advantage.

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