A cash-out refinance is a type of refinancing that allows you to tap into the equity in your home and also receive cash back at closing. You can work with a lender to get a better interest rate and/or consolidate debt into one monthly payment. You can also integrate your student loans into this process.
A student loan cash-out refinance is not the right choice for everyone. It’s helpful to weigh the pros and cons of cash-out refinance to decide if it makes the most sense for your personal financial situation.
Refinancing to Pay Off Student Loans
Before considering a student loan cash-out refinance, it’s helpful to review what refinancing is. In general, student loan refinancing means that a lender pays off your existing loans with a new one, ideally at a lower interest rate, which can save you money over time.
If you have federal student loans, you can only refinance with a private lender, which means you could lose certain federal student loan benefits and protections, such as income-driven repayment or forgiveness plans.
Calculate paying off your student loan before you decide whether this method makes sense for you.
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What Is a Student Loan Cash-Out Refinance?
If you own a home and have student loan debt, you can roll your student loan into your mortgage using a student loan cash-out refinance.
Here’s how cash-out refinance works: You get a mortgage loan that allows you to tap into your home’s equity to pay off your student loan debt. You consolidate your mortgage loan and your student debt. You also get a lump sum of money upon closing, which comes out of your home’s equity.
To qualify, you typically must have a credit score (a number that indicates how likely you are to pay back a loan on time) of at least 620 to get a mortgage that isn’t from a government agency. You also generally need to have a debt-to-income ratio (DTI) of under 43%, which refers to your monthly debt payment compared to your monthly gross income. You’ll also need at least 20% of equity in your home in order to take advantage of a cash-out refinance.
Your lender pays off your first mortgage, which results in a new mortgage loan, which probably has different terms than your original loan (a different type of loan and/or a different interest rate).
How Cash-Out Refinance Works for Student Loans
Typically, you can borrow up to 80% of your home’s equity. Equity refers to the difference between the current value of your home and the amount of money you owe on your mortgage.
To get a student loan cash-out refinance, you can prequalify and choose the right mortgage refinancing option for you. Your lender will detail the interest rate and monthly payments that fit your goals.
Once your application has been approved, you’ll sign your paperwork. Your lender will pay off your student loan at closing by sending the cash to your student loan servicer to take care of your student loan debt.
Taking out money for a cash-out refinance means you just move debt from one location to another. Ultimately, you still have to pay off that debt — it just takes a different form.
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Pros of Cash-Out Refinance for Student Loans
Why might you want to use a cash-out refinance to pay off student loans? Here are some of the reasons why it might be a good choice.
• You can get a better interest rate. Before you refinance, you want to make sure you’re getting a lower interest rate than your current student loan interest rate and your current mortgage interest rate.
Calculating the new interest amount will tell you whether you’ll save money. (You’ll also want to figure in any fees.) If you lengthen your loan term along with your cash-out refinance, you may lower your monthly payments but pay more interest over the long run.
• You may tap into tax deductions. The interest you pay on student loans and your mortgage are both typically tax deductible. However, you’ll have to itemize deductions if you choose a cash-out refinance with your mortgage.
You can take either the standard deduction or itemize deductions on your taxes. If your allowable itemized deductions are greater than your standard deduction or you cannot use the standard deduction, you can itemize. However, it’s important to note that the new larger standard deduction means you may want to consider whether it makes sense to itemize.
In tax year 2021, the standard deduction for married couples filing jointly is $25,100. For single taxpayers and married individuals filing separately, the standard deduction is $12,550. For heads of households, the standard deduction is $18,800.
• You no longer have to make two payments. Instead of making both a mortgage payment and a student loan payment, make one payment, which can help you stay on top of your payments.
Cons of Cash-Out Refinance for Student Loans
It’s important to consider the downsides of cash-out refinancing for student loans as well.
• You give up certain borrower protections. Rolling a federal student loan into your mortgage forces you to give up certain borrower protections that come with federal loans, such as income-based repayment plans, loan forgiveness, and other options through the Department of Education.
• You turn unsecured debt into secured debt. Student loans don’t require any collateral. However, your mortgage does, which means that you turn what was once unsecured debt into secured debt. If you stop making your mortgage payments, you could lose your home to foreclosure.
• You’ll pay closing fees. You’ll pay closing costs to refinance a mortgage, which can include title fees, appraisal fees, settlement fees, recording fees, land surveys, and transfer tax. The amount you’ll pay depends on your mortgage, the terms, and your state. You’ll want to consider whether these fees are worth what you’ll gain by refinancing.
When to Execute a Student Loan Cash-Out Refinance
It can be hard to decide when to refinance your student loans. This option may make sense for you if you:
• Know you’ll save money in the long run: It’s important to fully understand how a student loan cash-out refinance works. If you’ve calculated your new loan amount and know you’ll save money after streamlining your debt, you could be a good candidate for a student loan cash-out refinance.
A new repayment term over a longer period may seem like a great deal because you’re lowering your monthly payments, but you’ll pay more in interest over your loan term. You may also pay more in interest due to the higher loan amount which might give you higher potential fees and expenses.
• Have a plan to tackle your debt after refinancing: It’s important to be sure that you’ll be able to make your mortgage payments every month.
• Want just one payment: Having just one loan with a longer repayment term means you simplify your debt. This way, you don’t have to keep track of multiple payments every month.
Finally, you may want to go through with a student loan cash-out refinance if you know for sure that you won’t need or be eligible for federal student loan repayment programs, forgiveness options, or other benefits, and have a plan to tackle debt. It’s a good idea to envision your top priorities — whether you want to save money, prefer just one payment, or would like to lower your monthly payments — or prefer all three benefits!
There are other reasons you may consider getting a cash-out refinance to pay off student loans, but this list gives you a jump start.
Refinancing Your Student Loans With SoFi
SoFi offers both cash-out refinancing and student loan refinancing to help you save money when you refinance your student loans. Borrowers won’t ever have to worry about any fees and can apply quickly online today.
How long does underwriting take for cash-out refinance?
Refinancing a mortgage can take anywhere from 30 to 90 days, depending on how well you provide information to your lender, the complexity of the loan, and your lender or broker. The faster you provide documentation, the quicker your lender can underwrite and process your loan.
How do you get your money from a cash-out refinance?
Upon closing, you get a lump sum from your lender when you get a cash-out refinance. The loan proceeds pay off your existing mortgage(s), including closing costs and any prepaid items. You can do what you want with the remaining funds.
Do you pay closing costs on a cash-out refinance?
Yes, you’ll pay closing costs to refinance a mortgage. The amount you’ll pay depends on a variety of factors. It’s a good idea to consider how long it’ll take you to recoup your closing costs after refinancing.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
SoFi Loan Products
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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