Should you prioritize paying off student loans or your mortgage?

If you’ve bought a home and before you’ve paid off your student loans, you’re certainly not alone. According to a report from the National Association of REALTORS®, nearly a quarter or home buyers and 37% of first-time home buyers still have student debt. You may be wondering: Should I pay extra toward my mortgage or my federal student loans? The answer will depend on the interest rate on your loans, the term on your mortgage, and whether your debt has a forgiveness option.

How extra payments affect your student loan

Federal student loans are issued by the U.S. government with fixed interest rates and borrower protections in place. In contrast, private student loans are offered by banks or other lenders with varying rates and fewer repayment options. Federal student loans don’t come with prepayment penalties, but some private student loans do. Some federal loans allow for a portion of your loan to be forgiven. Private student loans typically do not offer loan forgiveness programs.

Like paying off a mortgage early, paying extra toward your student loan reduces your loan balance faster and the amount of interest you pay. Paying off your student loans early will also reduce the amount of debt you carry and lower your debt-to-income ratio, which could help you get a better interest rate on future loans. However, if you have high-interest credit card debt or not enough emergency savings stashed, it may not be worth it to pay off your student loans early.

Let’s say you borrowed $30,000 for school at a 6% interest rate, and your monthly payment is $300. If you just make one $300 payment per month, you’ll pay off your loan in 11 years and 7 months and pay $11,692 in interest. However, if you pay an additional $100 payment, you’ll pay off your loan nearly 4 years sooner and pay $7,694 in interest, saving you $3,998 overall in interest.

Benefits of paying extra on your mortgage

Making extra mortgage payments and paying off your mortgage early can come with considerable advantages, including:

• Building equity faster. Extra mortgage payments increase your home equity, which you can borrow to pay major expenses.
• Lower long-term interest. Paying off your mortgage early can save you significant interest, especially with long-term loans.
• Tax deductions. Mortgage interest is often tax-deductible, which can lower your overall tax liability. In contrast, student loan interest has a smaller deduction limit.
• Greater financial stability. Owning your home outright provides greater financial security and flexibility, reducing the risk of losing your property in the event of financial difficulties.
• Potential for better loan terms. Paying down your mortgage faster could improve your credit score and make it easier to refinance for better terms in the future.

Benefits of paying extra on student loans

There can also be big perks to paying off your student loans sooner, such as:

• Faster debt freedom. Paying off student loans quickly eliminates an additional financial obligation, freeing up room in your budget.
• Less total interest paid. Extra payments reduce the principal faster, which means you’ll pay less interest overall.
• Improved debt-to-income ratio. Eliminating student loan debt can improve your DTI ratio, which can help you get a lower interest rate on future loans.
• Better cash flow. Once student loans are paid off, you’ll have more disposable income, which can be allocated to savings, investments, or other financial goals.
• Emotional relief. Student loan debt can be a heavy burden. Paying it off can reduce financial stress and improve your overall financial well-being.

When to prioritize extra mortgage payments

Here are some cases where it can make sense to pay extra toward your mortgage:

• Your mortgage has a higher interest rate than your student loans.
• You want to own your home outright sooner.
• You want to build equity faster to eliminate private mortgage insurance.
• You’ve maxed out your retirement contributions.
• Your student loans have low interest rates.
• You qualify for at least some student loan forgiveness.

When to prioritize extra student loan payments

If some of the following scenarios apply to you, it can be a good idea to make extra student loan payments:

• Your student loans have higher interest rates than your mortgage.
• You don’t qualify for student loan forgiveness.
• You don’t qualify for income-based repayment benefits.
• Paying off your student loans can help improve your cash flow and reduce your debt-to-income ratio.
• You want to save on interest.

Should I pay off my student loans or save for a house?

What if you don’t own a home just yet, but your goal is to buy one soon. You want to save up a down payment, but that would mean you wouldn’t be able to pay off your student loans as quickly. Paying off your student loans first would help boost your DTI ratio and make it easier to qualify for a mortgage. Plus, having your loans paid off before you take on more debt could help you avoid putting yourself under too much financial pressure.

That said, it can make sense to prioritize saving for a house over paying your student loans early if:

• Your student loans have low, fixed interest rates.
• You can comfortably afford your minimum monthly student loan payment.
• You qualify for a student loan forgiveness program that reduces your balance over time.
• You’re able to comfortably afford a mortgage.
• You live in a market where renting a home is more expensive than owning one.

FAQ

Now, let’s look at some frequently asked questions about paying off your mortgage and student loans.

How can I pay off my student loans fast?

If you’re looking to wipe out your student loan debt, here are some strategies to help you pay down your student loans faster:

• Make extra payments when you can.
• Commit to paying a specific amount more than the minimum each month.
• Consider biweekly payments.
• Refinance if you have good credit and private loans are available.
• See if your employer has a student loan repayment program as a benefit.

Can I roll my student loans into a mortgage payment?

One way to roll your student loans into your mortgage is with a cash-out refinance. With this option, you replace your mortgage with a larger mortgage and withdraw the difference to pay off your student loans. If your student loans have a high interest rate, consolidating them with a single payment at a lower interest rate can be a way to manage your debt more effectively.

One way to do this is through Fannie Mae’s Student Loan Cash-Out Refinance Option. This program is designed to help homeowners pay off their student debt by refinancing to a loan with more favorable terms than a typical cash-out refinance.

Is it better to have savings or pay off student loans?

Before you consider making extra student loan payments, make sure you have enough of an emergency savings fund. It’s recommended to have at least 3 – 6 months’ worth of living expenses saved to cover unexpected costs like job loss, medical bills, or home repairs. These savings give you financial security while you’re paying off your student loans. If your student loan interest rate is low, you may consider instead contributing to a high-yield savings account or retirement account. However, if you have sufficient savings in the bank and your student loan interest rate is high, it makes sense to prioritize paying off your student debt.

What student loans should I pay off first?

If you have private student loans, it’s usually best to pay those off first. Private student loans typically carry higher interest rates and offer fewer borrower protections compared to federal student loans.

The bottom line: Prioritizing student loans or mortgage repayment

The answer to this question will depend on the terms of your debt. Ultimately, if your student loan interest rate is low and your mortgage term is long, extra mortgage payments may save you more in the long run. However, if your student loans have high interest and no forgiveness options, tackling them first may be the smarter move.

Once you feel like you’re in a good place with your finances, you can get a head start on the homebuying process. Start your mortgage application with the Home Loan Experts at Rocket Mortgage.