Interest rates are as high as we’ve seen since 2007. Combined with the velocity at which the Fed has raised rates — including four consecutive 0.75% interest rate hikes for the first time 1980 — Americans are having to adjust to a much different financial landscape.
That includes anything tied to interest rates, including savings accounts, credit card debt, mortgage rates and student loans. New loans are especially impacted. But so are previous loans with variable interest rates.
Is it a good time to refinance student loans with variable interest rates? And do credit inquiries impact one’s ability to get approved for a mortgage?
That’s what a listener of the Clark Howard Podcast recently asked.
Should I Refinance My Variable Rate Student Loans?
My student loans are charging me too much interest due to a variable interest rate. Should I refinance? That’s the question a listener posed to Clark on the Dec. 5 podcast episode.
Megan in Wisconsin asked: I have about $13,000 in private student loans with a variable interest rate, which is now up to 10.375%. I have been trying to get ahead on this, but every month, my payments end up only going to interest. Does it make sense to try to refinance? Or will I just end up in this situation with a different company?
Even with rising interest rates, it’s possible right now to get a refi loan at a significantly lower rate than 10.375%. Especially with a good credit score.
“The rates are not as low as they were last year. But SoFi is one of the biggest refinancers of student loan debt. There are others out there as well,” Clark says.
“So refinancing your student loan debt should get you a meaningfully lower rate. Well below that 10.375% variable. You should be able to also refi into a fixed rate at a lower rate than what you’re at right now with a good credit score. So get that done.”
The SoFi rates for a fixed-rate student loan refi max out at 8.99%. So even in the worst-case scenario, if approved, Megan should save 1.385% in interest. SoFi offers fixed-rate refinancing as low as 4.49%.
That’s not even considering that Megan’s variable-rate student loans could continue to raise interest rates into 2023.
In a vacuum, the decision to refinance here is easy. But Megan threw in another dynamic as well.
Will an Application for a New Line of Credit Impact My Mortgage Application?
Should you do anything that causes a hard inquiry on your credit — particularly initiating a new loan — if you’re planning to buy a house soon?
And what would mortgage loan companies think of any kind of debt?
Back to Megan in Wisconsin: “I have good credit, but have a co-signer on the loans that I hopefully wouldn’t need anymore. I don’t know if it matters that we’re going to buy a house next summer as well.”
Thankfully, the $13,000 in student loan debt is minimal.
“Your amount, as ugly as it is at 10.375%, is $13,000. That’s actually in this case a lucky 13, not an unlucky 13,” Clark says. “Because in the scheme of things, $13,000 in student loan debt is not something lenders will look at in an ugly way.”
Megan posed this question to Clark a few weeks before winter started. Considering she plans to apply for a mortgage in the summer — technically little more than six months away — she should refinance her student loans as soon as possible.
“As far as it affecting you applying for a house, recent applications for credit, mortgage underwriters look at with a stinkeye,” Clark says. “Generally a lot of underwriters, six months or less from the date you’re applying for a mortgage is kind of like a key trigger.
“So you want to get it done outside of that six-month window with how most mortgage underwriters will look at a new application for credit.”
Get away from variable rates on loans if at all possible. Right now, the interest on those loans is ballooning faster than a rat that lives in a dumpster behind a doughnut shop.
As far as applying for a mortgage, it’s a good idea to avoid initiating new lines of credit during a six-month period leading into your application.