Should You Refinance Your Home to Pay for Your Child’s College Tuition?

Female college student hugging her mother on graduation date.
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With interest rates on the rise, now is the time to consider refinancing your home before interest rates peak. Whether you’re refinancing for extra cash, to pay off high-interest credit card debt, to lower your mortgage rates, or even to help your child pay for college, it could be smart to act sooner rather than later.

However, refinancing your home is not for everyone. And it’s especially important to weigh all the factors if you are considering refinancing your home for your child’s college education. After all, a mortgage is a loan backed by collateral: your house. If you do a cash-out re-fi which increases your mortgage payments and then realize you can’t pay the larger monthly bill, your house could be foreclosed on.

But refinancing your home to lower your payments, either by reducing your interest rate or extending the loan term, can be a smart tactic to free up cash. Depending on how many years you have until your child starts college, you can put the money you save into a high-yield savings account — or use it to fund a 529 college savings plan.

For instance, U.S. News & World Report points out that if you free up $200 per month, you could save $12,000 in five years (and that’s assuming you aren’t investing the money to earn interest or dividends). That’s enough to pay for two years of community college, based on recent data from the National Center for Education Statistics.

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Ask yourself the following questions before you refinance your home.

  • Is my credit score good enough to qualify for a lower interest rate, which would lower my monthly payments?
  • If I extend the mortgage term to reduce my payments, will I be able to pay off my mortgage before I retire (or be able to afford the payments in retirement)?
  • Will refinancing my mortgage allow me to save enough money to make a difference before my children reach college age?

Refinancing Not For You?

Before you opt to refinance in order to help your children out with college costs, make sure you are on the right path in terms of your own retirement savings. You don’t want to struggle through your retirement with no money to pay for the things you need — or even enjoy — because it’s all going toward your mortgage. Depending on where you live, you could need as much as $1 million to fund your retirement, according to GOBankingRates. Chase Bank reported that most people need 90% of their working income to retire comfortably, but if you are still paying off a mortgage that number could be even higher. Most people can expect Social Security to deliver roughly 30% to 40% of that money, GOBankingRates reported.

If refinancing your mortgage to help pay for a child’s college tuition would put a comfortable retirement in jeopardy, it’s important to explore other options to pay for their post-secondary studies. Your child could opt to attend a more affordable trade school, receive certifications for their chosen career path, or even take out college loans. U.S. News & World Report says that federal student loans currently carry an average interest rate of 3.73% for undergraduate students. That may be lower than the interest rate for a mortgage re-fi, especially if your credit score is not classified as “excellent.”

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