Should I Pay Extra on My Mortgage or Student Loans to Avoid Debt?

Paying extra on your mortgage or student loans can be a great way to save money in the long run, but it's essential to consider which one to prioritize. If you have a high-interest student loan, paying extra on that can save you thousands of dollars in interest over time.

For example, according to our article, if you have a $10,000 student loan with a 6% interest rate, paying an extra $50 per month can save you over $2,000 in interest over the life of the loan.

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Paying extra on your mortgage or student loans can have a significant impact on your financial situation. Making extra payments can reduce your loan balance faster and the amount of interest you pay.

One of the main benefits of paying extra on your mortgage is building equity faster. Extra mortgage payments increase your home equity, which you can borrow to pay major expenses.

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Paying off your mortgage early can also save you significant interest, especially with long-term loans. For example, if you borrowed $30,000 for school at a 6% interest rate, and your monthly payment is $300, paying an additional $100 payment will pay off your loan nearly 4 years sooner and save you $3,998 overall in interest.

Extra payments on your student loans can also reduce the principal faster, which means you’ll pay less interest overall. Paying off student loans quickly eliminates an additional financial obligation, freeing up room in your budget.

In addition to saving money, paying off your debts early can also improve your credit score and make it easier to refinance for better terms in the future. Paying off your student loans can also reduce financial stress and improve your overall financial well-being.

Here are some scenarios where making extra student loan payments may be a good idea:

By paying down the balance faster, you could also qualify for better loan or credit options. Lenders look at debt-to-income ratios when approving loans, and a lower debt burden can mean access to lower interest rates on mortgages, car loans, and even credit cards.

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The tax implications of paying extra on your mortgage or student loans can have a significant impact on your finances. The student loan interest deduction is capped at $2,500 and is subject to income limits, with singles earning up to $80,000 and couples up to $160,000 being eligible.

You can claim the student loan interest deduction on any tax return, but the mortgage interest deduction requires itemizing. The mortgage interest deduction is more generous, with no income cap and the full deduction available for homes under $1 million. This makes it a more significant benefit for most borrowers.

Paying extra on your mortgage can reduce the effective interest rate of your home loan, making it a smart move if you're benefiting from the mortgage interest deduction.

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The tax implications of borrowing money for a mortgage or student loan can be complex, but let's break it down. The student loan interest deduction has a maximum of $2,500 and is phased out for individuals making between $65,000 and $80,000, and couples making between $130,000 and $160,000.

There's no income cap for the mortgage interest deduction, and you can claim the full deduction if your house costs less than a million dollars. The mortgage interest deduction can only be claimed if you itemize, unlike the student loan interest deduction which can be claimed on any return.

State tax programs can vary greatly when it comes to mortgages, so be sure to understand how your mortgage can affect your property taxes and state income taxes. Most borrowers will find that the mortgage interest deduction is a bigger benefit and reduces the effective interest rate of the home loan.

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Defaulting on your debts can have severe consequences, including trashing your credit and even landing you in court. Your credit score will take a huge hit, making it harder to get loans or credit in the future.

Defaulting on a mortgage is particularly dire, as it can lead to eviction, in addition to the negative credit consequences.

Ignoring student loans doesn't make them go away; it only makes them harder to deal with later.

Sam's debt kept growing while other financial habits, like overspending on takeout, distracted from the real issue. Without a plan, loans can spiral out of control, turning into a long-term burden that limits financial freedom.

Throwing money at your loans without a plan can slow down your progress. Some people make extra payments without specifying that the money should go toward the loan principal, which means more of their payment goes to interest.

You should consider your individual financial situation and goals to determine which debt to prioritize. If you have a mortgage with a high interest rate, it might make sense to pay extra toward your mortgage. On the other hand, if your student loans have higher interest rates, you might want to focus on paying those off first.

To decide which debt to prioritize, you need to consider the interest rates of your debts. Many people want to pay off higher-interest debt first, but you should also consider the tax treatment of the debts. Mortgage interest is usually tax deductible, while student loan interest deductions are capped at $2,500 per year.

For your interest: Higher Education Loan Authority of the State of Missouri

A good rule of thumb is to prioritize high-interest loans while making minimum payments on lower-interest ones. This approach can help you save money on interest and pay off your debts faster.

Here are some factors to consider when deciding which debt to prioritize:

Ultimately, the decision of whether to pay extra on your mortgage or student loans depends on your individual financial situation and goals. It's essential to create a budget and prioritize your debts accordingly.

If you have enough equity in your home, you can roll your student loans into your mortgage, but it's not without some caveats. There are three primary ways to do this: a traditional cash-out refinance, a Fannie Mae student loan cash-out refinance, or a home equity line of credit (HELOC) or home equity loan.

A traditional cash-out refinance lets you use your home's equity to refinance your existing mortgage into a new loan for more than what you owe, with the excess funds sent directly to you to pay off your student debt. Fannie Mae's option sends the funds directly to your student loan servicer, waiving the loan-level price adjustment.

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However, rolling student loans into a mortgage doesn't make them disappear - you still have to repay them, just under different terms and conditions. You'll likely incur high fees in the process and pay more in interest over the life of the new loan.

Here are the three primary ways to roll student loans into a mortgage:

Before making a decision, consider the pros and cons of rolling student loans into a mortgage. Keep in mind that your home won't be used as collateral if you refinance your student loans with a private lender, separately.

Paying extra on either your mortgage or student loans can save you thousands in interest over the long term.

Saving money on interest is a key benefit of paying off debt faster, and it can be achieved by making extra payments or refinancing your loan. Every extra dollar toward the principal reduces how much you owe, shortening the repayment period and cutting interest costs.

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A lower debt burden can also mean access to better loan or credit options, including lower interest rates on mortgages, car loans, and credit cards.

Paying off student loan debt faster can create financial flexibility, reduce stress, and give you more control over your future.

Here's a comparison of the long-term cost savings of paying extra on your mortgage versus student loans:

Keep in mind that these are general estimates, and your individual situation may vary. However, as you can see, paying off student loans faster can be especially beneficial, as it can save you thousands in interest and free up cash flow for savings, investments, and long-term goals.

Let's take a look at a real-life example of what happens when you ignore your student loans. Meet Emi and Antonio, a couple who struggled with debt for years because Emi treated her student loans as something she'd "just die with".

Emi's mindset kept them stuck in a cycle of debt, delaying their financial progress. She justified her way out of paying off her student loans by thinking everyone dies with student loan debt.

Ignoring student loans doesn't make them disappear, as Emi realized too late. Treating student loans like any other debt and planning to pay them off is key to breaking the cycle and building real financial stability.

For more insights, see: Cycle Count