Prioritizing multiple financial responsibilities often feels like a juggling act. Maintaining balance can be difficult because our money goals and obligations aren't really independent from one another, even if it seems that way.
On the contrary, our financial responsibilities are interdependent—for example, saving for a dream vacation likely means scaling back on discretionary spending like dining out or going to the movies.
The takeaway is that meeting your financial obligations doesn't have to be all-or-nothing. Instead, you can learn to chip away at several competing money goals at once.
Of course, all this serious money consideration begs the question: How do you balance your student loan payments and your mortgage?
For starters, let's acknowledge that this is indeed a good problem to have. You own a home, and you have a college degree—both assets are tremendous advantages in today's economy.
What's more, the credit reporting agencies put this kind of debt in a different bucket than revolving consumer accounts, such as credit card debt. Both types of debt fall under the "Amounts Owed"category of your FICO score, but credit card debt tends to carry more weight because maintaining a low credit utilization ratio (which only takes revolving credit into account) is critical.
Where your credit score is concerned, the less of your available credit you're using, the better.
Still, deciding how to divvy up your money when your paycheck hits your checking account can be tricky. Here are a few insider tips to make it a little easier:
● Student Loans
First, understand the difference between simply meeting your financial obligations and paying off your debts ahead of schedule. The former means making good on all your open accounts, while the latter is going above and beyond.
Needless to say, going above and beyond is all well and good if you’re able, but for most of us it just isn’t an option.
No matter what, make every effort to meet the minimum monthly requirement across the board.
Of course, we’re all human and life happens, so don’t panic.
Occasionally missing a student loan payment isn't going to automatically tank your credit. Sometimes life throws you a financial curve ball that derails your budget.
Although no one is suggesting that you underestimate the importance of keeping your finances on track, correcting course after a single misstep is within reach, even if it means getting pinned with some late payment fees.
To get back on track, reach out to your lender, explain the situation, and take steps to get your account back in good standing. (Check out this handy step-by-step breakdown if you've missed a student loan payment.)
Mortgages work a little differently. Every lender is unique, but the promissory note you signed at closing should outline the consequences of missing a payment.
Some lenders offer a grace period during which you can still send your payment in without getting hit with a late fee. Generally speaking, most lenders will offer about 30 days to get your payment in, but make sure to check first.
Whether for student loans, mortgages, credit cards, or energy bills, enrolling in auto-pay is a great way to take a “set-it-and-forget-it” approach.
Auto-pay pulls double duty by preventing late payments and helping to build your credit score because you're routinely making on-time payments. Some student lenders, including CommonBond, will even offer a slight interest rate reduction for enrolling in this service.
Making good on all your payments allows you to consider another question: Which debt should you accelerate (i.e. pay off faster)?
From a numbers-and-sense perspective, prioritizing debt that has a higher interest rate is wise, since higher interest rates ultimately cost you more.
If your mortgage has a 4 percent interest rate and your student loan has a 6 percent interest rate, throwing extra money at the student loan is in your financial best interest—unless your lender charges a prepayment penalty. (FYI, CommonBond doesn't believe in penalizing people for accelerating their debt payments. If anything, we'll give you a high-five!)
Next, refinancing your student loans can be a game changer if you can lock in a lower interest rate. If the new rate on your student loan is lower than what you're paying on your mortgage, then prioritizing the mortgage makes the most sense.
The same is true in reverse. Depending on your situation, refinancing your mortgage could potentially save you thousands over the life of your home loan, especially since interest rates are on the rise.
Another option is paying off your student loans in one fell swoop by taking out a home equity loan or home equity line of credit (again, assuming there's no prepayment penalty). Borrowing against your house could save you a considerable amount in the long run if the resulting interest rate is lower than what you're paying on your student loans.
You can also fold your student debt into your mortgage by opting for a cash-out refinance that converts your student loan debt into housing debt.
One other note: If the interest rates on your mortgage and student loans are pretty reasonable, you might not want to accelerate either. Instead, investing any extra monthly income could potentially reap a better return over the long term.
For example, by putting $100 a month every month into a Roth IRA now, your investment will grow to over $121,000 over the next 30 years, assuming an average annual return of 7 percent.
Ultimately, there isn't one single right or wrong way to balance your student loans and mortgage. It’s worth keeping in mind that, once you’re making the minimum payments each month, refinancing your student loan and/or your mortgage can help you save money and clarify which debt to prioritize.
Still have questions? CommonBond can get you on the right track.