Refinance Mortgage to Pay Student Loans to get mortgage interest deduction

[orthodoc1984]

I have roughly 200k in equity in my home and around 230k in student loan debt.  I am thinking of refinancing the hose to pay off the loans.  This will allow me to covert non-deductible student loan interest to deductible mortgage interest.  The interest rates of the house is 4% and loans are 5%.  Any thoughts?

[erictait]

I'd probably do it.

[wideopenspaces]

I think I would do it as well as long as it doesn't increase the mortgage interest rate and you are certain you can't refinance the loans to a lower interest rate. And then I'd plan to pay off that part of the mortgage just as quickly as you were planning to pay off the student loans. Or you could sell the house and pay off the student loans? But I tend to be debt averse.

[adventure]

orthodoc1984 wrote:

I have roughly 200k in equity in my home and around 230k in student loan debt.  I am thinking of refinancing the hose to pay off the loans.  This will allow me to covert non-deductible student loan interest to deductible mortgage interest.  The interest rates of the house is 4% and loans are 5%.  Any thoughts?

Click to expand...

Great thought.

The house interest rate is mostly irrelevant. The 2nd mortgage, or HELOC rate is pertinent. You should see what sort of rate you can find. Then, you'll need to calculate the savings from the mortgage interest rate deduction. Schedule A instructions here too. You'll need your overall rate rate/% here. Do you know your federal/state tax rate? One note here, is to determine if you are currently, or if it'd then be beneficial to itemize. Given your mortgage payments, age of loan, etc, you may/may not be itemizing at this point. If you are not, and this extra interest would allow you to itemize (e.g. claim more than the standard deduction, you can also find other things to claim, further making this a good decision. (e.g. CME, work trips, stethoscope, good will donations, etc))

That rate is what you'd need to compare to a loan refinance with the common lenders.

To recap, find your HELOC, 2nd, or cash out refinance rate options, determine if you itemize when you file taxes, and find your rate options through student loan lenders.

[Zaphod]

mortgage debt is superior to student loan debt in almost every way.

[Craigy]

Big barriers to refi IMO are closing costs, dealing with appraisal, trading your old lower rate for a new higher rate, etc.

But yeah I'd rather have a big mortgage + no student debt than small mortgage + student debt.

[hightower]

Definitely a good strategy in your situation. It will really simplify your debt and allow you to just focus on paying down your mortgage while reaping the tax benefits of mortgage interest.  Do a cash out refinance and shop around.  I would consider a 15 year loan assuming you'll be able to afford the payments.  Rates on 15 years are still ultra low right now.  Even a 30 year is still not going to be more than 4%.

As Craigy said though, it will depend on your ability to get an appraisal at the right price (remember you can only borrow up to 80% loan to value in most situations, although a "doctor mortgage" company might be able to help you go higher) and you will have to fight with the bank to keep your closing costs down.