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How a Student Loan Cash-Out Refinance Works for Homeowners

Note that the situation for student loans has changed due to the impact of the coronavirus pandemic and relief efforts from the government, student loan lenders and others. Check out our Student Loan Hero Coronavirus Information Center for additional news and details.

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If you own a home and owe student loans, you could consider rolling your student debt into your mortgage with a student loan cash-out refinance. With this approach, you can consolidate your home and student debt and potentially save money with a lower interest rate — but you could also lose certain student loan protections, along with other potential downsides.

To learn more about this option, let’s look at the pros and cons, as well as:

Student loan cash-out refinance basics

A student loan cash-out refinance allows you to roll your student debt into your refinanced mortgage. Online lender SoFi, in partnership with Fannie Mae, is one lender offering this option.

If you use SoFi’s cash-out refinancing option, you can borrow up to 80% of your home’s equity. Equity is the difference between the current value of your home and how much you owe on your mortgage. If you owe $200,000 and your home is worth $300,000, for example, you have $100,000 of equity in your home. With SoFi’s cash-out refinance program, you could refinance up to $80,000.

You could also roll your student loan debt into this amount. If you owe $30,000 in student loans, for instance, your total student loan cash-out refinance amount would be $110,000 ($80,000 plus $30,000).

This $30,000 difference would be sent directly to your loan servicer to pay off your student loan. Any student loans you roll into this refinance would need to be repaid in full.

While the balance on your student loan account will go down to zero, you’ll still owe this amount as part of your refinanced mortgage. So even if it feels like you’re student loan-free, you’re still responsible for paying it back, just in the form of your home loan.

Eligibility requirements for a student loan cash-out refinance
● Have at least 20% equity in your home
● Have a positive credit history, cash flow and meet other common underwriting criteria
● Plan to use the cash-out refinance to completely pay off student loan debt

Benefits of a student loan cash-out refinance

For borrowers, there are three main benefits to a student loan cash-out refinance.

You could save on interest

The primary purpose of a student loan cash-out refinance is to save money on interest. If you have high interest rates on your student loans, you could potentially benefit from refinancing them with your mortgage.

As of March 2021, the average mortgage refinancing rate starts as low as 2.33% APR on 15-year terms and 2.71% APR on 20-year terms, according to Zillow. If you can snag a low rate, you could potentially save money.

However, it’s important to keep in mind that stretching out repayment over a long period of time could result in higher interest costs. Plus, you might be able to get a similarly low rate through refinancing your student loans separately, without needing to roll them into your mortgage.

You can consolidate your debt

When you use a student loan cash-out refinance, you essentially combine your student loan debt with your mortgage. Instead of making separate mortgage and student loan payments, you’ll make a single payment to your lender.

This is one way to consolidate your loans and simplify repayment. However, note that student loan refinancing can also consolidate federal and private student loans, and direct loan consolidation can combine federal loans.

You can ditch your student loan servicer

If you’ve had bad experiences with your student loan servicer, you might welcome the opportunity to leave them behind. Since your mortgage lender will pay off your student loans, you’ll no longer have to deal with your student loan servicer. Instead, you’ll pay your refinanced loan back to your mortgage lender.

Potential drawbacks of a student loan cash-out refinance

Despite the potential benefits a student loan cash-out refinance could bring, this move isn’t right for everyone, due to the risks involved.

You turn your unsecured student loan into a secured loan

A student loan is considered an unsecured loan, since it isn’t tied to any piece of collateral. Although the consequences of defaulting on a student loan can be severe, a lender usually can’t take your property away from you. A mortgage, on the other hand, is tied to a very important piece of collateral — your home.

If you can’t pay back your mortgage, you run the risk of going into foreclosure. So if you’re worried that rolling your student loans into your mortgage will make your monthly payments unaffordable, you’re probably better off avoiding a student loan cash-out refinance.

You sacrifice student loan plans and protections

When you leverage your home equity to pay off your student loans, you also give up access to student loan plans and protections. Federal loans are eligible for a number of repayment plans, including income-driven repayment.

They also qualify for deferment and forbearance, as do some private student loans. Plus, federal loans can be eligible for student loan forgiveness programs. If you roll your student loans into your mortgage, you’ll no longer be eligible for these plans.

You lose some of the equity you’ve built up

Since a student loan cash-out refinance involves folding education debt into your mortgage, you’ll increase the amount you owe on your home. As a result, you’ll lose some of the equity you’ve built up, so you’ll no longer own the same portion of your home — instead, the bank will.

You could extend student loan repayment

Finally, rolling your student debt into your refinanced mortgage could mean you’re paying off student loans longer. If you have nine years left on your student loan term, for instance, but you choose a 30-year mortgage term, you’re extending your time with your student loans. Although a longer term could make your monthly payments more affordable, it could also lead to higher interest costs over time, even if you do qualify for a low rate.

When it makes sense to execute a student loan cash-out refinance

As you can see, a student loan cash-out refinance doesn’t come without drawbacks. Lengthening your loan term and paying more in interest applies to your mortgage, too, and originating a new home loan could also mean incurring new fees.

Most severely, a student loan cash-out refinance could remove education debt repayment safeguards and increase the risk of foreclosure of your home.

Before choosing this route for the previously mentioned benefits, you must run the numbers first. Ask yourself…

  • What does the math show?
  • Do you come out ahead if you consolidate your student loans with your mortgage?
  • Or would it cost you more over time?

You may still decide paying more over time is worth it if a refinance provides your cash flow with immediate relief. If you struggle with making your mortgage payment and your student loan payment each month, a refinance could help if it lessens your total monthly burden in the short-term, freeing up room in your family budget.

It could also make sense to try for a student loan cash-out refinance to improve your debt-to-income ratio. After all, your new, lower monthly dues might be more in line with your income.

A student loan cash-out refinance could be wise too if you’re tempted to spend your spare cash on something other than zeroing student loan balances. It would lock you into a monthly payment plan to (eventually) extinguish both your education and mortgage debt.

Additional steps to undertake a student loan cash-out refinance
  1. Estimate your home equity: Talk to your mortgage loan officer about how much of your home you own. Keep in mind you’ll need to order an appraisal to gauge the most current value of the property.
  2. Consult a tax expert: A student loan cash-out refinance could have consequences for your existing student loan interest deduction. Be sure to talk to a professional about all the implications for your taxes.

Alternatives to combining your mortgage and student loan payments

Although a student loan cash-out refinance has some benefits, the downsides could outweigh the perks. Instead of rolling your student loans into your mortgage, you could consider refinancing your student loans separately.

By refinancing, you could get a lower rate and choose new terms on your debt. You could also consolidate multiple loans into a single monthly payment. However, refinancing federal loans also involves a sacrifice of federal repayment plans and protections.

If your student loan debt is burdensome, you could also search for student loan repayment assistance or loan forgiveness programs.

Kali Hawlk and Andrew Pentis contributed to this report.

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