$1.36 trillion. That’s the nationwide student loan debt level as of the third quarter of 2017. One solution to eliminate this debt hits a little close to home.
Around this time last year, Fannie Mae and SoFi teamed up to offer cash-out refinance loans to homeowners with student loans. Cash-out refinancing generally works to consolidate the student loan debt with the mortgage by paying off one’s student loans using proceeds from the new loan.
Is it wise to combine your student loans with your mortgage?
Of Student Loan and Mortgage Debt
In the third quarter of 2017, the U.S. student loan debt increased by $13 billion to $1.36 trillion. Mortgage debt, on the other hand, showed a quarterly increase of $52 billion and totaled $8.74 trillion during the relevant quarter.
While both types of consumer debt rose in 3Q17, it’s interesting to note that homeowners have wealth hidden in their homes. This is home equity, which accumulates over time when they make their monthly mortgage payments and home prices appreciate.
As of the second quarter of 2017, homeowner equity reached $8 trillion per CoreLogic. This home equity can be taken out for various purposes, primarily to consolidate existing debt such as student loans.
Why Consolidate Student Loan Debt via Cash-out Refinance
Combining your existing student debt with your mortgage via cash-out refinance can be a beneficial move to end your student debt woes.
Primarily, you eliminate a higher interest-rate debt (student loan), get a new lower rate (mortgage) and make a lower payment in turn.
Interest rates can be your greatest motivation in folding your student loans into your mortgage debt. Mortgage rates are historically low; imagine jumping from 6% to 4% per month.
This results in greater savings on interest costs over the life of the loan.
With just a single payment, you can focus on paying and making sure you are on top of your monthly obligations.
Things to Consider
You need to have equity, the right amount of it, to be allowed to refinance and take cash out of your home.
For conventional lenders, they require at least 20% home equity or 80% loan-to-value ratio. FHA and VA loans allow for homeowners to cash out up to 85% and 100% of the home’s current value, respectively.
Because a cash-out refinance is a new loan, you’ll go apply for the loan complete with underwriting and verification.
Also, ask yourself if you are ready to give up benefits relating to your federal student loans such as debt forgiveness and income-repayment plans if you were to refinance it with your mortgage.
More importantly, you have to be more careful in paying your monthly mortgage dues because your home is at stake if you fail to do so.
Student Loan Cash-out Refinance
SoFi, a Fannie Mae approved lender, offers cash-out refinances that pay off your existing student loan debt. Under this student loan payoff refinance, SoFi disburses the payment of the unpaid student loan directly to the servicer.
Aside from this option, Fannie Mae has rolled out simpler guidelines and flexibilities for homeowners with student loans to do a cash-out refinance.
This student loan cash-out refinance enables borrowers to:
- Pay in full their student loans with a mortgage refinance at a lower rate.
- Exclude certain items from their debt-to-income ratio, e.g. debt paid by others in the last 12 months and mortgage debt paid by a party obligated to the loan for the last 12 months.
Do you qualify for a cash-out refinance? Speak with a lender today.Click to See the Latest Mortgage Rates»