Should I Refinance My Home to Pay Off Student Loans?

You may be better off refinancing student loans separately rather than rolling them into your mortgage.

Ryan LaneMay 14, 2020
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Should I Refinance My Home to Pay Off Student Loans?

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Mortgage lenders may let you use your home’s equity to pay off student loans. This type of loan is called a “student loan cash-out refinance,” and it would eliminate a debt from your life.

But that convenience could cost you: If you leverage your house to pay off student loans, you put your home at risk if the larger balance ends up overwhelming you.

It may make more sense to refinance your student loans separately. It won’t get rid of that debt, but it could help you pay off student loans faster.

What is a student loan cash-out refinance?

A student loan cash-out refinance is a type of mortgage that lets you use your existing home equity to pay off student loans. To qualify for this option, the money you receive must:

  • Repay at least one student loan in full.

  • Pay off a loan in your name — you can’t put the money toward a child’s loan, for example.

  • Be sent to your student loan servicer at closing.

For example, say your home is valued at $300,000, your mortgage is $200,000 and you owe $40,000 in student loans. You could take out a student loan cash-out refinance loan totaling $240,000, and the mortgage lender would provide the extra $40,000 to your student loan servicer.

Drawbacks of a student loan cash-out refinance

Your student debt won’t really go away

Sure, the cash-out refinance will pay off your loans. But you’ll still owe that money as part of a bigger mortgage. That loan hopefully comes with a smaller payment than your previously separate debts. But your new mortgage may cost you more overall if it doesn't offer a lower interest rate, shorter repayment term or both.

You give up student loan benefits and protections

Federal loans have options like income-driven repayment plans if you fall behind on payments. If the loans do default, the consequences can be serious, like having your wages garnished. But those penalties aren’t as severe as foreclosure, which would be possible if you can’t pay a cash-out refinance loan.

You can lower your rate in other ways

If your goal is to save money on your student loan payments, consider refinancing those loans by themselves. The best APRs for mortgage refinancing and student loan refinancing are comparable, and refinancing just your student loans wouldn’t put your home at risk.

Who should consider this option?

You typically shouldn’t add unsecured debt, like student loans, to loans tied to collateral, like mortgages. The biggest reason to do so would be if the savings outweigh the risks.

That may be the case only if you have a small student loan balance or high-interest federal PLUS or private loans. But if you're intent on paying off your loans, additional reasons to consider a student loan cash-out refinance could include:

  • You'll save compared with other lending options. A student loan cash-out refinance would likely offer better interest rates than a personal loan or home equity line of credit. It also has lower fees and simpler eligibility terms than a typical cash-out refinance.

  • Your debt disqualifies you from other options. Your monthly mortgage and student loan bills could make your debt-to-income ratio too high to be approved for other types of loans. By combining them into a single, lower bill, you may qualify for a better interest rate right now, as well as on additional loans in the future.

  • You don't trust yourself to use the loan money to pay the debt. Because student loan cash-out refinance funds go straight to your servicer, you won't be tempted to spend that money elsewhere. Plus, if you’re done borrowing student loans, you likely won't increase your overall debt. That might not be the case if you used a cash-out refinance to pay off high-interest credit cards, for example, only to accumulate more credit card debt.

Which lenders offer student loan cash-out refinance?

Student loan cash-out refinancing is available on Fannie Mae-backed loans. But few lenders advertise this option.

The most notable is SoFi, which began offering this program in 2016, and lets you receive up to 80% of your home’s equity. SoFi mortgages are not available in every state, and you’ll need to meet the lender’s eligibility criteria to qualify.

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