Debt Consolidation: Risks of Cash-Out Refinancing Explained

Andrew risks worsening his financial situation by consolidating low-interest mortgage debt into high-interest student loans.

### Evaluating Cash-Out Refinance for Student Loan Repayment
* 💭  Andrew is considering a cash-out refinance to pay off his student loans, moving from a **3.25% mortgage to a 7% mortgage** and increasing his loan balance from **$280,000 to $360,000**.
* 📉  The concern arises from consolidating non-secured debt, like student loans, into a secured debt against his home, which could **risk losing his house** if he defaults.
* 🔍  It's crucial to be cautious with debt consolidation, especially when **high-interest rates** are involved, as it may lead to **financial vulnerability**.
* 💔  Andrew seems to have a **negative perception of his student loan debt** compared to his mortgage, which is leading him to make **potentially poor financial decisions**.
* ⚖️  The math indicates that by refinancing, he would be **increasing the proportion of his debt at a higher interest rate**, which is **not financially beneficial**.
* 💡  Instead of simply swapping debts, Andrew should focus on strategies to **increase his income or reduce expenses** to effectively tackle his student loans.
* 🚀  The recommendation is to take an **aggressive approach to debt repayment** rather than consolidating debts that could lead to a **false sense of security**.
* 🔑  Ultimately, Andrew needs to reassess his financial strategy to ensure he is making **meaningful progress** rather than just **shifting debts around**.

[Music] We got a question from Andrew in the queue. Ready for it, Andrew? Yes. It says, Should I cash out refi my mortgage to pay off student loans? Would I be going from a 3.25% mortgage to a 7% and from a loan balance of 280k to 360k? What do you think about this? Wa wait a minute. I don't understand. You understand go from 360 to 280. Surely it's got to be that. Oh no, he's saying that he needs to do a cash. Take the 280 to 360 to pay off the debt. Yes, that's what's the interest rate on the debt. Um, you know, he didn't say. He just said mortgage. Okay, the mortgage balance is going to go from 280 to 360, not his total debt balance. Got it. Or was the student? The student loans were 280. Read it again, ra. One more time. Let me just read. I'm getting a little L too. Okay, should I cash out or refine my mortgage to pay off student loans? Here's some of

the details. I'd be going from a 3.25% mortgage to a 7% mortgage and from a loan balance of 280k to 360k. So, he going to take 80 grand in the cash out, and that's going to go to the student loans. Got it. Okay. Got it. Cool. Cool. Cool. Yep. We're on track, Andrew. Feel free to clarify in the chat if you'd like. Let's start high level before we actually drill into the details of the numbers and the specifics. I am of the opinion, and I think we would agree on this, that you always want to be careful when you're thinking about debt consolidation because that gets a lot, especially in the world of high-interest rates. A lot of people are trying to figure out, okay, how can I consolidate my debts into different things, and how can I really try to squeeze that balloon down to get my interest rate as low as possible? Well, one of the things that's really, really

unique is you want to be careful when you're consolidating debts that you go begin consolidating non-secured debt, right? Like so a student loan. If for some reason you could not pay your student loan and you got into a bad situation, they can't come take the education away from you. They're not going to, you know, walk in your office and rip the diploma off the wall. It does not work that way. But if you trade that non-secured student loan debt and now you use your home, you go out and take a mortgage, and you have a secured asset that you're taking debt out to go pay off that student loan debt, and now you can't pay your debt, well then they can come take your house. That is something you want to be very careful of. So, I something you need to live your primary residence. I would be very careful using that as a replacement for non-secured debt. So, with that sort of big overarching academic principle, what do you think about these numbers, Brian? Like

3.2 to 7 well I I I think Andrew I think you're falling into a mental trap here and I this is look when we talk about personal finance a lot of this stuff we love the math of it but a lot of this stuff 80% of it can also fall into avoid falling into mental traps because you are Your Own Worst Enemy um when it comes to your finances because what you I think you just have a problem having the student loan debt he's got a negative um perception of this student loan debt versus the mortgage because you can tell this by the fact that he has a mortgage uh $280,000 at three 3 and a qu% and that that seems okay to him that he's comfortable with it but then he has this $880,000 in student loan debt he didn't give us the interest rate so we don't have the context on that but he's willing to now throw out the three and a qu% $280,000 mortgage just so he can get 100% of that student

loan debt into the column of Mortgage Debt. And I think that this is bad math and it's a mental trap in the fact that because you're thinking about if I've got to get rid of this student loan debt and then I'll be in mortgage which in your mind is like okay it's okay to have mortgage but whereas when I look at this from an outsider looking into your situation I'm like yeah but you've got a large portion of this at a 3 and 1/4% interest rate probably a $80,000 that's at a higher interest rate with the student loans you don't like the student loans at 7% so it's right at 7% you're going to now throw out you're making my point perfectly this is a mental trap versus an actual Financial trap and the fact that you're now going to move to where I haven't done the math off but essentially 60 to 65% of the debt that you're paying at 3 and a qu%.

you're now going to push up to the higher 7%. That just doesn't pass. It might feel better to say, I've paid off my student loans and it's all mortgages, but from a financial standpoint, I think you're doing some compartmentalizing. That's not healthy. Now, here's what you can do. Student loan Andrew didn't say how old you are, but 7% student loans, depending on your age, right? Whether you're in your 20s or whether you're in your 30s, you do have to figure out, Okay, how do I want to start attacking this? How do I want to be aggressive about paying it off? I think I like the strategy where you're using your cash flow and your earning power to do that instead of just swapping one debt for the other. I think if you're swapping one debt for the other, all you're doing is shifting cards around on the table. You're not actually making any meaningful movement, so figure out how

Can I either increase my income or cut my expenses and really start knocking out this debt to get to a place that I feel more comfortable with?

Should I Cash Out Refinance My Mortgage to Pay Off Student Loans?

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Considering a Cash-Out Refi to Pay Off Student Loans

Andrew is contemplating a cash-out refinance, increasing his mortgage from $280k at 3.

25% to $360k at 7%, to pay off his student loans.

The decision involves consolidating debt, which can be risky, especially with high-interest rates.

The discussion emphasizes the importance of being cautious when considering debt consolidation strategies.

Consolidating non-secured debt, like student loans, can be risky if it involves taking on secured debt, such as a mortgage.

If unable to pay the secured debt, the lender can take the asset, like a house.

It's important to be cautious when using a primary residence to replace non-secured debt.

Transitioning from student loan debt to mortgage debt can create a mental trap, as it may seem acceptable to have a mortgage.

However, this shift can lead to paying a higher interest rate on a larger portion of debt, which is not a smart financial move.

Instead of swapping debts, it's better to use cash flow and earning power to aggressively pay off the student loans and make meaningful progress.

Increasing income or cutting expenses can help in managing debt effectively.

Finding additional sources of income or negotiating bills can provide extra funds.

Creating a budget and prioritizing necessary expenses can lead to significant savings and debt reduction.