Save for College While Saving on Your Mortgage

Wouldn’t it be nice to earn enough to save for all your goals? This might include building a hefty emergency fund and maxing out your retirement contributions—all while saving for your kid’s college education. But sometimes, there isn’t enough money to go around.

If you must choose between saving for college and retirement, some financial experts recommend prioritizing retirement. The reason is simple. While there are plenty of ways to pay for college including loans and scholarships, there isn’t a loan or scholarship for retirement.

Of course, prioritizing retirement doesn't mean you can’t look for ways to save for a child’s education. Cutting expenses—starting with your housing expense—could be the ticket to building a college fund. But don’t think you have to downsize and move.

Refinancing could free up the cash you need to get a college fund off the ground. But first, it’s important to understand how refinancing works.

What’s the Goal of Refinancing a Mortgage?

Refinancing is the process of getting a new mortgage to replace an existing one. Since you’re replacing an existing mortgage, you must meet the income, asset, property, and credit requirements of a mortgage program. Plus, you’ll also need to pay for mortgage-related expenses such as the appraisal and closing costs (which you may be able to roll into your loan).

You can read our blog about things to do before applying for a mortgage.

If you’re eligible, refinancing can help you secure better loan terms. Some people refinance to borrow cash from their equity. But refinancing is often a means to reduce one’s mortgage payment, which is why it comes in handy when saving for college.

1. Get a lower rate

Falling mortgage rates create the perfect opportunity to get a lower interest rate on a home loan. Since mortgage rates have an impact on monthly payments, a cheaper rate could reduce your monthly payment. If you’re able to lower your monthly payment, you can then funnel the savings into a college fund for your children.

For example, put the savings in an Education Savings Account or Education IRA which offers various investment options and allows contribution up to $2,000 per year per child.

Open a 529 plan that allows for higher contributions, or keep the money in an online high-yield saving account to maximize your growth.

2. Get rid of PMI

Refinancing doesn’t only save money when you’re able to get a lower mortgage rate. Sometimes, refinancing can eliminate private mortgage insurance (PMI), which is often required when a borrower puts down less than 20%.

As you pay down your mortgage and/or your property appreciates in value, there’s an opportunity to get rid of PMI once you have at least 80% equity. Getting rid of mortgage insurance can result in additional savings, allowing you to allocate more money to your kid’s college fund.

3. Refinance a smaller balance

If you’ve had your mortgage for a while, you’ll probably refinance for less than your original mortgage balance. A lower mortgage balance coupled with a lower interest rate and the elimination of PMI can result in tremendous savings on a monthly basis.

The savings will vary depending on circumstances, but let’s say you’re able to save $400 a month. If so, that’s $4,800 you can allocate to your kid’s college fund each year, or $24,000 after only five years.

As a side note, if you decide to cash out some of your equity to pay for educational costs, rather than refinancing for the benefits described in this article, your mortgage balance will increase. Depending on how much you borrow, your mortgage payment could also increase, impacting your monthly cash flow.

The loan experts at Blue Spot Home Loans can provide refinance advice and guidance based on your short and long-term savings goals. If you have any questions about mortgages or refinancing, give us a call or fill out the contact us form today.