Consider Refinancing Your Mortgage to Cover College Expenses

Returning to school or helping a child pay for college can feel overwhelming, especially as tuition costs continue to rise. Most families cannot cover the full cost of college with grants and scholarships alone, prompting many to explore student loans for additional funding.

Homeowners, however, may have another option—refinancing their mortgage to increase their available savings.

Even saving a small amount for college can significantly reduce the need for loans. The more you save, the less you’ll need to borrow, and since student loans must be repaid with interest, borrowing less can save a lot over time.

One of the easiest ways to save money is by cutting down on major recurring expenses, such as a home mortgage. According to July 2021 data from the U.S. Census Bureau, the average homeowner spends more than $1,600 per month on housing costs.

If you own a home, refinancing your mortgage could potentially save you hundreds of dollars each month, freeing up funds for college expenses.

However, refinancing isn’t the best choice for everyone. It depends on factors like credit scores, interest rates, and specific college costs.

Here are a few things to consider if you’re thinking about refinancing your mortgage to pay for college.

Will You Save Enough in Time?

Homeowners with strong credit scores tend to receive better interest rates, potentially saving hundreds of dollars a month. For instance, a family that reduces their mortgage payment by $200 per month would save $12,000 over five years—enough to cover two years of tuition at a community college, according to data from the National Center for Education Statistics.

But timing is crucial. It takes time to build savings from a refinanced mortgage, and if college is fast approaching, you may not have enough time to accumulate what you need. Ensure you’ll have enough time to save before college bills are due.

Variable vs. Fixed Interest Rates

Some lenders offer adjustable-rate mortgages (ARMs), where the interest rate can change over time based on market conditions. While the initial rate on an ARM might be lower, it could increase later, leading to higher payments in the future.

Given the Federal Reserve’s recent signals about raising interest rates to combat inflation, it’s wise to consult a financial advisor before locking into a mortgage rate that could change and become more expensive over time.

Extending the Mortgage Term

You might lower your monthly mortgage payment by extending the loan term, potentially freeing up money for college costs. However, this approach can result in paying more interest over the life of the loan, possibly making it more expensive than taking out a student loan. Be sure to calculate the additional interest before opting for this strategy.

Alternatives to Mortgage Refinancing

Not every family can refinance a mortgage, and for many, student loans may be the best or only option.

This isn’t necessarily a bad route. Federal student loan interest rates for undergraduates are currently 3.73%, which may be lower than mortgage rates, especially for families with average or below-average credit.

Federal student loans generally offer more favorable terms and conditions than private loans. State-based and nonprofit student loan providers can also offer good options with transparent terms and benefits.

The Bottom Line

Each college financing strategy has its tradeoffs. While refinancing a mortgage may be a viable alternative to student loans for some families, it’s important to evaluate all your options and choose the best one for your specific situation.