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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 âstudent loan withdrawal refinanceâ.
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 a student loan repurchase refinance?
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.
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:
- General collection refinancing
- Refinancing a student loan through Fannie Mae
General collection refinancing
Best for: Homeowners who are not eligible for the Fannie Mae program or want to use their extra money for multiple expenses
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
Credible makes refinancing easier. You can view the prequalified refinancing rates from our partner lenders in just a few minutes. We also provide transparency on lender fees that other comparison sites typically don’t.
Fannie Mae Student Loan Solutions
Best for: Borrowers who can pay off their student loan in full with the proceeds of the withdrawal
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 repay their student loans using the equity in their home 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, an 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.
- You can get a better rate. Refinancing a student loan usually 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 the interest deduction on student loans, you will 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.
- Student loan debt does not go away. When you take money out of a refinance to pay off your student loan, you are moving 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 loan debt, you are turning what was once unsecured debt into secured debt. This means that your house 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
Best for: Borrowers with private 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 these savings, you can make larger student loan payments and pay off the balance faster.
Remember that while you can refinance a federal student loan from 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.
Real estate refinancing at interest rate and term
Best for: Homeowners who can reduce their mortgage rate by 0.75%
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 any money as part of the transaction, if you lower your mortgage payment you can use the savings to pay off your student loan.
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
Best for: Borrowers who do not qualify for refinancing, who do not want to pay closing costs on a refinance, or who want to use a simple strategy
Most borrowers are only required to make one student loan payment per month, but you can 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.