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How Refinancing My Mortgage to Pay Off Student Loans Became a Costly Headache

By Christy Bieber – Feb 29, 2020 at 10:00AM

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I thought refinancing my mortgage to pay off my student loans would be simple, but things didn't go as planned.

When I graduated from law school with more than $100,000 in student loan debt, paying down my loans was something of an obsession. I aggressively made extra payments on them for several years until I got the balance down to around $60,000, and then I decided to refinance my house to repay the rest. 

This seemed like a great idea at the time. I didn't qualify for the student loan interest deduction, but I did qualify to deduct mortgage interest. Therefore, I could convert my student debt to debt with tax-deductible interest by rolling it in with my mortgage. Plus, my interest rate was lower on my mortgage refinance loan than on the student loans I owed.

Unfortunately, the whole project became a big hassle and, while I ultimately was able to successfully accomplish my goal, it cost me much more time and money than anticipated. 

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The mortgage refinance appraisal was too low

In order to repay my student loan debt by refinancing my mortgage, I needed to take a cash-out refinance loan and borrow that extra $60,000 I needed to retire my loans for good. This meant my home had to appraise for enough that my loan-to-value ratio -- or the amount of my outstanding loan relative to what my home is worth -- was high enough. 

Since we'd made a large down payment on our home, had been making payments for three years, and had enjoyed some appreciation in the value of our house, my husband and I assumed this would be no problem. Unfortunately, our initial appraisal came in very far below the amount we needed to accomplish our goal. In fact, based on our appraisal, we would have been able to borrow enough to pay off only about $10,000 of what I owed. 

By this time, we'd already spent several hundred dollars on the appraisal, so we were looking at being out this money if we didn't go forward. We'd also spent tons of time providing paperwork to our mortgage broker. 

We decided to appeal the appraisal. While the good news is that the new appraisal came in high enough to accomplish our goal, this took a lot of extra time. And if the appraiser hadn't been willing to consider using the alternative comparable sales I provided him with, we could have been out the money and time we'd spent with nothing to show for it. 

Closing costs were much higher than expected

Another thing I didn't expect when we started the process were the high fees for closing on the mortgage refinance loan. 

These fees included a new lender's title insurance policy that cost several thousand dollars and that I hadn't known we would need since we'd already purchased title insurance several years before when we got our mortgage upon buying the home. 

In addition to the lender's title policy, we also incurred costs for waiving escrow because we didn't want to have our bank responsible for paying for our insurance and property taxes. Banks normally collect money for these costs each month, which makes your monthly mortgage payment higher. We prefer to pay them ourselves instead of having the bank obtain the funds and put them in escrow until payments are due, but banks charge if you do this. 

The thousands of dollars we spent on these expenses meant I didn't save as much money by refinancing the loans as I had initially expected. It will take a long time for the reduced interest rate to make up for these high fees. 

Should you get a mortgage refi to pay off student debt?

Ultimately, I was glad I ended up refinancing because I did accomplish my goal, and I was still able to get some interest savings. Refinancing also enabled me to consolidate all my debt into my mortgage loan so I had just one monthly payment to make. But the process was a major hassle, and there was a very good chance it may not have worked out in the end.

If you're considering using this approach with your own loans, make sure you're aware of the high closing costs you could end up paying so you can confirm that the math makes sense. And be aware that if your appraisal comes in too low, you may not be able to get the money you were hoping for to cover your debts in full. 

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