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Student loans can obstruct your financial life for years long after graduating from college. Many people are still able to get a home even with all that student loan debt. For anyone with equity, using it to pay off their student loans by requesting a second mortgage is a smart decision as a lot of money can be saved and the loan terms can be readjusted to suit your current financial situation that is probably a lot different.
Convention wisdom says the earlier you pay off your student loans, the better off. Paying off the loan will not only save interests but it will improve your debt-to-income ratio, a factor lenders consider when deciding whether to offer you credit. A second mortgage, also known as a home-equity loan, is a good option for paying off big debts.
Advantages of Second Mortgages
The biggest advantage of using a second mortgage to pay off a student loan is that a home equity loan will usually have longer terms than the student loans. This could lower your monthly payments and improve your debt-to-income ratio. A huge incentive for anyone who can itemize deductions on their federal income tax return is that he will most likely be able to deduct all the interest paid on the home equity loan.
A good thing to remember is that interest rates for home equity loans are often (but not always) higher than those of student loans. But whether you qualify to itemize or not, you're allowed to deduct a portion of the interest you pay annually on your student loan so the higher interest rate won’t have such importance and your monthly payments will still be lower.
Main Drawback
The other important point to keep in mind is that student loans are unsecured debt. If you can't meet your student loan payment, the worst thing that can happen is that you'll ruin your credit. Your home secures a home equity loan, and if you default on it you can lose your home.
When you request a home equity loan you are offering the property as security for the loan and missed payments will eventually lead the lender to take legal action against the property guaranteeing the loan. The legal action of repossession is always available for the lender to recover what he lent. That’s the main reason why a longer repayment period, lower monthly payments and low interest rates are featured by these loans. The risk involved for the lender is considerably lower as he can recover his money one way or another.
Other Solutions
Most private student loan lender will agree to a loan reschedule if you can’t meet the monthly payments. Moreover, most of these loans come with grace periods that you can request at certain times in order to postpone payment till you recover from financial difficulties. Federal Student Loans though more strict, also offer certain forbearances and other benefits in case someone can’t temporary afford the monthly payments. You should consider all these options before deciding whether to resort to a second mortgage for easing your debt problems.
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