How to Leverage Home Equity to Pay Off Student Debt
Student loan debt is never easy to manage, but the burden can become overwhelming once you add a mortgage, a car, and other financial obligations. Stare at your balance long enough and you may start wondering what it would take to win the lottery—as if it were even possible to tip the odds in your favor.
Fortunately, there’s another option.
SoFi now offers a way for you to use the excess value of your home to pay off student loan debt directly.
“Most families with student loan debt would do better using home equity to eliminate that debt, instead of resorting to using credit cards as a short-term solution,” says my colleague Helen Huang, Senior Director of Product Marketing for SoFi’s mortgage products. “Mortgage interest rates are often lower than student loan interest rates. So homeowners can use that to their advantage. Paying off student loans with equity means making only one payment per month, which not only simplifies life, but can also save borrowers money.”
How much you can save depends on the difference in interest rates—the bigger the gap, the better the savings. For example, if you’re paying 6.31% interest on a Direct PLUS student loan, but can refinance your 30-year mortgage at a 4.00% interest rate, you’ll not only pay off your student loans, but can refinance your mortgage to a lower rate, saving you significant mortgage interest in the long run.
Working with SoFi, you can consolidate your student loans with your existing mortgage, refinance the total amount at a lower rate, and simultaneously pay off those student loans. If approved, monthly payments would decline, freeing up cash for paying down the principal.
The Elements of Equity
When your home is valued at more than what you owe on the mortgage, you have equity. Say you took out a $250,000 mortgage 10 years ago, and have since paid back $50,000 of what you owe. That means you may have $50,000 in available equity for an in-ground pool for the kids, a new car, or, best of all, to refinance and eliminate your student loans.
Sound good? It may be even better. If you’re a ladder-climbing professional, who’s great at financial planning, chances are you bought that dream home in a growing market, and it’s now worth $400,000 or more. Your $50,000 in equity just ballooned to $200,000!
When It‘s Time to Leverage Your Home Equity
Cashing in on your home equity isn’t as easy as withdrawing money from your checking account, but it’s also not as difficult as you might think.
Start by contacting a mortgage lender, who will order an appraisal of your home and get you started on paperwork. At the very least, you’ll need your latest tax filings, pay stubs, and bank statements. Lenders use those documents to evaluate whether you have the savings and cash flow to pay back a fatter mortgage, and they’ll ask for them every time you try to refinance. So always keep them handy.
Equity is a tool for improving your financial position,” Huang explains, “Use it to pay off higher interest credit cards or student debt, or to make high-value improvements to your home—like remodeling a kitchen. Banks need to know you can use the equity responsibly.”
And make no mistake—that advice applies equally to seasoned homeowners as it does to younger professionals just starting a family. Parents often carry student loans on behalf of their children, so drawing on a bounty of home equity earned over multiple decades could save thousands of dollars in interest.
SoFi’s student loan payoff and mortgage refinance option offers competitive rates and zero lender fees, while paying off outstanding student debt directly to the servicer. Pre-qualifying takes just two minutes online, and loans are usually approved in 30 days or less.
Unlike taking your chances with the lottery, the odds are in your favor when you work with SoFi. Find your rate, and then get in touch with us to start the refinancing process. Learning is a lifetime commitment; student loan debt doesn’t have to be.
By refinancing your home to pay off a federal student loan you will lose your federal benefits such as income-based repayment or income contingent repayment. If you refinance your home to pay off a private SoFi loan you may also lose certain benefits such as unemployment protection. In either case, your unsecured student loan debt will be replaced with debt secured against your residence.