Should You Refinance Your Mortgage To Pay Off Your Student Loans?

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If you have a large student loan, it might be a good idea to pay it off using the money from a cash refinance. This is commonly known as “student loan withdrawal refinance”.

Increasing home equity can help you qualify for cash refinancing and borrow more money. In the first quarter of 2021, homes with a mortgage earned $ 33,400 in equity, the largest average equity gain in at least a decade, according to real estate data company CoreLogic.

But before you refinance your mortgage to pay off your student loans, it’s important to know what it entails, the downsides you might encounter, and the alternatives to consider:

What is student loan repurchase refinancing?

A student loan refinance is a mortgage that allows you to use the equity in your home to pay off a student loan balance. This means that you are combining your mortgage and your student loan into a new loan.

You can also lower the interest rate you pay on your student loan debt, which saves you more money.

To qualify, you will usually need to use the money to fully repay a student loan on your behalf. The lender will send the money directly to the student loan manager on closing.

For example: Let’s say your house is valued at $ 200,000, your mortgage balance is $ 100,000, and you owe $ 50,000 in student loans.

You could refinance a student loan totaling $ 150,000, and your mortgage lender would use the $ 50,000 to pay off your student loan.

To find: How to refinance your mortgage in 6 easy steps

Types of Student Loan Refinance Loans

If you want to use the equity in your home to pay off your student loans, you have two options:

  1. General refinancing of collection
  2. Refinancing of a student loan through Fannie Mae

General refinancing of collection

When you make a general refinance with cash, you take out a new mortgage for more than you owe, pocket the money, and pay off the new mortgage over time. You can use the money for any purpose, including paying off student loans.

To be eligible, you will generally need to have:

  • A credit score of at least 620
  • A debt-to-income ratio of less than 50%
  • At least 20% of your home equity after the cash-out refinance closes

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Fannie Mae’s student loan solutions

Fannie Mae’s Student Loan Solutions program is designed to help student borrowers better manage their monthly payments and qualify for a mortgage. One feature of the program allows homeowners to pay off their student loans using their home equity at lower rates.

Eligibility depends on several factors:

  • Cash-out refinancing funds must fully repay at least one student loan.
  • The student loan (s) must be owned by the borrower requesting the refinancing.
  • The loan must be taken out through Desktop Underwriter, Fannie Mae’s automated underwriting system; manual subscription is not allowed.
  • For a single unit property, the borrower will need to adhere to standard refinancing guidelines, including: a credit score of at least 620, a DTI of 50% or less, and at least 20% of the equity in the home. house after closing.

Advantages and disadvantages of refinancing a student loan

A student loan repayment refinance pays off your student loans and can help save you money in some cases, but keep in mind that you will be responsible for a new mortgage.

Advantages

  • You can get a better rate. A student loan cashing refinance typically has lower rates than other loan options, such as personal loans and home equity loans. So if you qualify, you will likely save some money in the process. Be sure to calculate the total interest bill, however, as the lengthening of the term may result in higher interest payments.
  • You can benefit from certain tax incentives. For example, the interest you pay on a student loan is generally tax deductible. The same goes for mortgage interest in some cases. The catch is, unlike deducting interest on student loans, you’ll have to itemize your taxes in order to capture the mortgage interest savings.
  • You simplify your payments. Consolidating two loans into one streamlines your payments, which can help you organize your finances and ensure you pay the bill on time.

The inconvenients

  • Student loan debt does not go away. When you take money out of a cash refinance to pay off your student loan, you move debt from one place to another. You can save some money in the process, but eventually you will have to pay it back.
  • You waive certain borrower protections. If you pay off a federal student loan with cash refinance, you lose important protections for borrowers, such as income-based repayment plans and generous hardship options.
  • You risk foreclosure: By refinancing your mortgage to pay off your student debt, you are turning what was once unsecured debt into secured debt. This means that your home is used as collateral. If you have trouble paying off your new mortgage, you risk losing your home.

When to consider a student loan repayment refinance

Before applying for a student loan refinance, ask yourself these questions:

  • What is the interest rate on my student loan? Shifting your debt from an adjustable rate student loan to a fixed rate home loan can help make debt payments more predictable.
  • Will I save money by integrating my student loan with my mortgage? If the interest rate on withdrawal refinance is lower than your student loan interest rate, you will likely save money. Calculate the amount of interest you would pay on the original loan and per refinance. You may not save money if you extend the term of the loan too much.
  • What type of student loan do I have? It might not make sense to build a federal loan into your mortgage, as you will lose important protections for borrowers, such as forbearance, deferral, and income-driven repayment plans. But borrowers with private student loans may be the winners when it comes to refinancing.
  • What are my other options? You can still refinance your student loans, refinance at lower risk rates and terms, or make bi-weekly student loan payments if you are looking for ways to save money.

Alternatives to cash-out refinancing of student loans

Using your home as collateral can be risky, so if you’re looking to be more careful, there are other options for paying off your student debt.

Refinance your student loans

When you refinance a student loan, a private lender pays off your balance and gives you a new loan based on your creditworthiness. It can help you save money and lower your payments if you qualify for a student loan with a lower interest rate.

With the savings, you can make larger student loan payments and pay off the balance faster.

Remember that while you can refinance a federal student loan with a private lender, it is not always a good idea because you will lose some borrower protections. Use a student loan refinance calculator to see if a refi makes sense.

Find out if refinancing is right for you
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Real estate refinancing at interest rate and term

Interest rate mortgage refinancing involves taking out a new mortgage with a new interest rate, a new loan term, or both. You won’t be borrowing money as part of the transaction, if you lower your mortgage payment you can use the savings to pay off your student loan debt.

Mortgage experts say refinancing is a smart move if you can lower your interest rate by at least 0.75%.

Make bi-weekly student loan repayments

Most borrowers are only required to make one student loan payment per month, but you could pay every two weeks instead. With bi-weekly student loan payments, you’ll cut your bill in half and pay that amount every two weeks.

With this strategy, you will effectively make 26 half payments, or 13 full payments, during the year. This can speed up your repayment and potentially help you save money as interest will accrue on a smaller balance.

About the Author

Kim porter

Kim Porter is an expert in credit, mortgages, student loans and debt management. She has been featured in US News & World Report, Reviewed.com, Bankrate, Credit Karma, and more.

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