Social Finance, an online lender commonly known as SoFi, launched a new product Wednesday that allows homeowners to refinance their mortgage and use their home equity to pay down student debt. It’s the first product of its kind on the market.
Homeowners have long been able to refinance their mortgage or use what’s called a cash-out refinance to tap their home equity. But this product, called Student Loan Payoff Refi, is unique in that it’s cheaper than a cash-out refinance and it lets borrowers pay lower rates on their student loans. Fannie Mae is backing the loans, which are available to borrowers in the 27 states (plus the District of Columbia) where SoFi has a mortgage license.
If homeowners take to the product, Fannie Mae hopes to make the option available through its other partner lenders nationwide next year, says Jonathan Lawless, vice president for product development and affordable housing at Fannie Mae.
SoFi estimates that 8.5 million households could benefit from Student Loan Payoff Refi, including parents who have co-signed their kids’ student loans. Given that scope, it “could be the next big thing,” Lawless says.
But should it be? NerdWallet took a look at who qualifies, how it works and whether it’s a good idea.
How to qualify
- A credit score that’s at least 620. If you don’t know your score, you can get it here.
- A debt-to-income ratio that’s 45% or less. That means all of the monthly debts you owe don’t equal more than 45% of your monthly income.
- A loan-to-value ratio that’s 80% or less. That means the amount you owe on your mortgage divided by your home’s value is 80% or less.
How a student loan payoff + mortgage refinance works
Through SoFi’s program, you can refinance your existing mortgage and use up to 80% of your home’s equity to pay down your student debt. Say your home is valued at $300,000 and your mortgage is $200,000 with an interest rate of 3.9%. You also owe $40,000 in student loans with a 6.5% rate. You’ll refinance your mortgage — your new rate will depend on your financial profile — and take out a new loan totaling $240,000.
In this example, SoFi would use $40,000 to pay off your student debt directly through your loan servicer instead of giving you that equity in cash. That gives you a lower interest rate than you’d get with a typical cash-out refinance, because the lender knows exactly where the extra money is going.
If your available home equity doesn’t cover the total amount of student loan debt, SoFi will pay down your student debt partially using your loan and you’ll continue to make payments on your remaining balance to your student loan lender or servicer.
Is using your home equity to pay down student debt a good idea?
The biggest potential benefit to SoFi’s Student Loan Payoff Refi is the opportunity to get lower rates on your student loans. Mortgage rates are historically low — under 4% — and many people have student loan rates that are 6% or higher.
However, you could end up paying more in interest over time by extending your student loan terms with a mortgage. Student loan terms range from five to 25 years, while most mortgage terms are 15 or 30 years.
Borrowers who are interested in SoFi’s new product should first compare rates for a regular mortgage refinance or student loan refinance, says Andrew McFadden, a certified financial planner and founder of Panoramic Financial Advice. He points out that borrowers with excellent credit can refinance their student loans separately and get a rate almost as low as mortgage rates. Keep in mind, though, that when you refinance federal student loans, you lose access to federal benefits like income-driven repayment plans and forgiveness programs.
If you’re sold on the idea of tapping your home equity to get rid of your student debt, you can apply for SoFi’s Student Loan Payoff Refi on the company’s website. If you’re unsure, it’s worth talking to a financial advisor about your specific situation first.