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Ask Money

Refinancing and student loans

Chris Farrell Aug 30, 2011

Question: My wife and I are planning to refinance to take advantage of today’s low rates. We were pleased to see that our home appraised for more than we thought it would, and now are considering taking out a larger loan to pay off some $25K in private student loans. Thoughts? Mike, Irvine, CA

Answer: It’s easy to see the attraction of eliminating the private student loans, especially at today’s low interest rate. But since you asked, the drawback to consider is increasing the financial risk of owning your home.

What got many homeowners into trouble during the bust wasn’t the first mortgage on the home. It was taking out a second mortgage or refinancing more than needed to get rid of other debts (such as credit cards debts, auto loans, and student loans) during the boom.

When the bubble burst the extra loans on the home were a genuine source of financial strain. Suddenly, with a lost job, a medical emergency, or some other setback the missed payments on debt meant facing a rising risk of foreclosure. The borrowers had lost the flexibility to keep the home safe and negotiate for relief on their other loans.

Yes, there isn’t much built-in flexibility with private student loans but, in a pinch, you could still take action without involving your home. It’s a trade-off I’ve never really liked. I’m not a fan of retiring other debts with home equity.

This is the potential drawback I would weigh before making your decision. That said, in your particular circumstances this particular financial move looks like it will have a small overall impact on your finances from a risk perspective.

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