Paying off one loan with another is a standard form of debt reshuffling or consolidation. When it comes to student loans, though, your options may seem limited. It is, however, possible to roll student loan debt into a new mortgage through a cash-out refinance loan – as long as you have sufficient equity in your home.
But just because you can, it doesn’t mean you should. Here are some tips on how to consolidate student loans into a mortgage—and whether it may be the right move for you.
Rolling Student Loans Into a Mortgage
A cash-out refinance loan is a type of mortgage loan that enables you to turn a portion of your home’s equity into cash. Simply refinance your existing mortgage for more than what you currently owe into a new loan with new terms and keep the difference.
Once you have the cash in hand, and as long as there are no loan conditions to payoff specific debt with the cashout, you can do whatever you want with it, including paying off your student loans.
You may need to do the legwork of determining how much you need to add to the new proposed loan and may be responsible for ordering the final payoff. If it is not a condition of the new mortgage loan, the lender would normally not request escrow to order the payoff and pay the loan in full at loan closing. If you would like escrow to perform this service for you, just let them know.
Once you’ve completed the loan consolidation process, you may still have the same amount of debt as you did before (possibly more if you added any applicable closing costs to your new loan). You’ll just be paying it all in one monthly payment, based on your new mortgage terms.
In 2016, Fannie Mae introduced the Student Loan CashOut Refi option to offer simpler eligibility terms and reduced fees designed to provide additional options for borrowers who carry student loan debt. The Fannie Mae cash-out refinance loan directly pays off your student loan debt through your servicer instead of giving you the money. Student loans chosen for pay off must be paid off in full under this program.
If you want to refinance student loans into a mortgage, it could be beneficial in some situations. However, it’s important to understand the benefits and drawbacks of doing so and also to compare the benefits of this option with other alternatives.
One such drawback is that you may no longer be eligible for student loan benefits , such as federal student loan repayment plans . This includes Income-Driven Repayment (IDR) , where your monthly student loan repayment changes according to your income. You also may no longer be eligible for student loan forgiveness options, such as Public Student Loan Forgiveness (PSLF) .
Pros and Cons of Rolling Student Loans into a Mortgage
Depending on your debt situation and your credit profile, consolidating student loans and your mortgage into new terms can be a good idea or a terrible one. Here are some of the pros and cons to consider.
• It could lower your interest rate: If you pay a higher interest rate on your student loans and current mortgage vs a new Cash Out Refi, consolidating may help reduce how much you pay in overall interest.
• It could lower your monthly payment: If you score a lower interest rate and choose a longer repayment period with the new loan, it may significantly lower the total amount you pay each month for your mortgage and student loans combined.
• It simplifies your finances: The fewer monthly payments you have to keep track of, the better. If you have multiple student loans, rolling them into your mortgage can make your life easier.
• You could end up paying more interest over time: Stretching a 10-year student loan repayment term to up to 30 years could end up costing you more in interest, even if the interest rate is lower. Also, if you have paid down a 30 year mortgage for a few years and originate a new 30 year mortgage, you will be extending your existing loan term and may be paying additional interest over the life of the loan.
• You may not be eligible: To qualify for a cash-out refinance loan, you typically need to have at least 20% equity left over after the new loan amount on the cash-out refinance. Even if you do have more than 20% equity right now, the difference might not be enough to pay your student loan in full which is required under the Fannie Mae Program (partial payments of a student loan is not allowed).
• You may pay closing costs: Depending upon the rate and term you choose, you may have applicable closing costs. Sofi was the first lender to partner with Fannie Mae on their Student Loan CashOut Refi. Ask us or any eligible lender for a quote on this program specifically and compare the rate and fees of this program to a standard cash-out refi.
• You may be reducing the amount of available equity in your home: Taking cash out of your home can reduce the amount of available equity in your home. Market value fluctuations can also impact the amount of available equity.
3 Alternatives to Rolling Student Loans into a Mortgage
Before you seriously consider consolidating student loans into a mortgage, it’s important to know what other options you may have for paying down your debt faster.
1. Refinancing your student loans
Whether you have federal or private student loans, you can refinance your student loans with a private lender like SoFi. Depending on your credit, income and financial profile, you may qualify for a lower interest rate, monthly payment, or both.
You can also gain some flexibility by choosing a longer or shorter repayment term.
2. Seek repayment assistance
Employers are increasingly offering student loan repayment assistance as an employee benefit. Well-known companies that provide this perk include Aetna, Fidelity, PricewaterhouseCoopers, Staples, SoFi, and more. If your current employer doesn’t offer student loan repayment assistance, consider finding a job that does when you are next seeking employment.
3. Apply for student loan forgiveness or grants
Depending on your career path, you may qualify for student loan forgiveness or grant programs. Examples of these programs include (but are not limited to):
• Health care
• Veterinary medicine
If you’re working in one of these fields or a similar one, check to see if there are forgiveness or grant programs that you qualify for. Additionally, as a heads up, a cash-out refi may make you ineligible to participate in these programs. Check on any possible loss of benefits before considering a refinance of these loans.
Deciding if Rolling Student Loans into a Mortgage is Right for You
Using a cash-out refinance to consolidate student loans and a mortgage into one affordable monthly payment sounds appealing, especially if you can get a lower interest rate than what you’re currently paying. But it’s crucial to consider all of the costs involved before you make a decision.
A lower interest rate, for instance, doesn’t necessarily mean you’ll pay less interest over the life of the loan. Work with a mortgage loan officer or run an amortization schedule in order to do the math.
Also, keep closing costs in mind. Closing costs can vary depending upon the loan scenario and is tied to factors such as the interest rate you choose, your credit score, loan type, property type and more.
And paying closing costs is not a given. For instance, you can choose to take a higher interest rate (if it is still lower than what you currently have) and use the lender rebate money built into that higher rate to cover some or all of your applicable closing costs. When the time comes to lock in your rate, speak with your chosen lender about various loan programs and the estimated closing costs tied to each rate and term option.
Finally, take a look at some of the other options out there and determine whether you could potentially save more money with them. The more time you spend researching, the better your chances of settling on the option that can save you the most overall.
When paying down student loan debt faster, there’s no one-size-fits-all solution. The more information you gather about your options, the easier it will be to eliminate your debt as quickly as possible.
If you are interested in consolidating your student loan debt at a lower interest rate but don’t want to roll them into your mortgage, you may instead want to consider student loan refinancing. With SoFi student loan refinancing, you can refinance your private or federal loans (or both!) with no application fees, origination fees, or prepayment penalties. And you still get the benefit of consolidating your loans to one payment, with a new (and potentially better) interest rate and loan terms.
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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.