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Rolling Student Loans Into Your Mortgage: Can And Should You Do It?

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Published on January 4, 2021
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Student loan debt is an unfortunate reality for many Americans. The average borrower owes $37,584 after graduation. And in the U.S., total student loan debt has ballooned to nearly $1.6 trillion.

One of the biggest challenges that comes with student loan debt is that it limits a borrower’s options. Studies have shown that many borrowers delay major milestones, including buying a first home, because they are trying to pay off student loan debt.   

Fortunately, student loan borrowers have options, and there are ways to reduce monthly payments and continue living your life. And if you’re a current homeowner, one option you may not have considered is consolidating student loans into your mortgage.

But how do you roll your student loans into your mortgage? And if so, what are the risk and benefits to this decision?

How To Roll Your Student Loans Into Your Mortgage

For borrowers looking for ways to consolidate their debt, Fannie Mae offers a cash-out refinancing program. When you do this, you pay off your student loans by refinancing your mortgage.

This may sound like a no-brainer but it’s important to familiarize yourself with the ins and outs of refinancing before you get started. There are certain risks to using this strategy to manage your student loan debt.

With a traditional cash-out refinance, any cash that is received is sent to you directly. With a student loan cash-out refinance, the funds are sent to your student loan servicer. Fannie Mae will also waive the loan-level price adjustment that normally comes with a cash-out refinance.

You’ll need to meet the following conditions to qualify for a student loan cash-out refinance:

  • At least one student loan will be paid off in the process – partial payoffs are not accepted
  • You have a minimum 80% loan-to-value ratio in your home
  • You’ll receive a maximum of $2,000 back once the loan is paid off

Pros

When you roll one loan payment into another, this is known as debt reshuffling. That’s because the debt isn’t really gone, you just moved it around. However, there are several advantages to using this strategy:

  • Minimize monthly payments: One of the hardest parts about taking on multiple debts is that the monthly payments can become overwhelming. By rolling your student loan debt into your mortgage, you’ll only have one monthly payment instead of two. This can give you some much needed breathing room in your budget.
  • Reduced interest rate: By rolling your student loan debt into your mortgage, you’ll likely end up with a lower interest rate. A lower interest rate could end up saving you thousands of dollars over the life of the loan.
  • Take advantage of tax deductions: You can deduct the interest on your mortgage for loans up to $750,000. However, you’ll need a tax specialist to help you with this.

Cons

There are downsides to any financial decision you make, and a student loan cash-out refinance is no exception. Here are a few things you should consider before making the leap:

  • Lose federal protections: If you took out federal student loans, those come with certain borrower protections. For instance, you can apply for an income-driven repayment plan or request forbearance if you fall on hard times. You will lose these protections by rolling your student loans into your mortgage.
  • Put your home at risk: Rolling your students loans into your mortgage will make your mortgage balance higher. If you’re unable to make the payments at some point, you’re putting your home in jeopardy.
  • You could pay more on your student loans: When you refinance, you’ll likely end up with a lower interest rate. However, you could end paying more on your loans over time if the payment terms are longer.

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Questions To Ask Before Rolling Your Student Loans Into Your Mortgage

If you’re in a good financial position and are willing to accept the risks, rolling your student loans into your mortgage could be the right choice for you. Let’s look at a few questions you can consider before moving forward with this decision.

Am I Prepared To Accept The Risk Of Turning An Unsecured Loan Into A Secured Loan?

When you take out an unsecured loan, you’re not putting up any type of collateral to guarantee the loan. Student loans are a good example of this because if you default on your loans, your lender can’t take your home or other property.

Your mortgage is a secured loan because your home is used as collateral for taking out the loan. So, if you’re unable to make your monthly payments, you could end up losing your house. For that reason, you should only consider a student loan cash-out refinance if you’re in a very stable financial situation.

Will My Interest Rate Rise Or Fall?

Most people choose to refinance their home because they’re hoping to secure a lower interest rate. But how do you know if you’ll receive a lower interest rate on a student loan cash-out refinance?

Securing a low interest rate not only ensures that you’ll pay less every month, but you’ll end up paying less on your mortgage overall. Even if the monthly change seems small, these payments add up quickly over a 30-year loan.

To determine whether your interest rate will rise or fall, you’ll compare your current interest rate with the refinance rate. If you need help running the numbers, the Quicken Loans® Amortization Calculator can help.

How Much Will It Cost To Cash Out Refinance?

The downside to refinancing is that you will have to pay closing costs, which are typically between 2% – 3% of the total loan amount. This can be a substantial amount of money so it’s important to plan for these costs ahead of time.

Will The Amount I End Up Paying In Total Go Up Or Down?

Rolling your student loans into your mortgage can help you simplify your finances and reduce your monthly payments. But will it end up saving you money? That really depends on your current financial situation.

For instance, borrowers who have a high credit score will be able to apply for the most favorable rates. So, if you’re able to secure a low interest rate, you could end up saving money over time. And if you reduce the term of your loan to 15 years, that could give you substantial savings as well.

But if you don’t have a good credit score, you won’t be able to qualify for the best rates. And if you roll a 10-year student loan into a 30-year mortgage, you’ll likely end up paying more on the loan over time.

Other Options

If you’re still not sure about rolling your student loan into your mortgage, there are other options you can consider. If you have federal loans, you could look into loan forgiveness programs.

The U.S. Department of Education offers many loan forgiveness programs for borrowers. If you work in public service, you may qualify for the Public Service Loan Forgiveness Program. This program gives full loan forgiveness after 10 years of consecutive payments. 

You can also look into having your loans forgiven through an income-based repayment program. This program caps your loan payments somewhere between 10% – 15% of your total monthly income. After making consistent payments for 20 – 25 years, you’ll receive full loan forgiveness.

Another option is to finance your student loans without rolling them into your mortgage. If you have multiple student loans, you’ll consolidate them into a single loan and will earn a lower interest rate. This loan consolidation can help you simplify your student loans without putting your home at risk.

You can also consider taking out a low-cost personal loan or home equity line of credit to repay your student loans. However, these options come with risks as well and you should compare the numbers to a cash-out refinance to see which option saves you more money in the long run.

Summary

If you’re struggling to repay your student loans, then a student loan cash-out refinance can sound pretty tempting. After all, you could pay your loans in full and possibly lower the interest rate on your mortgage. But this option is not as straightforward as it sounds.

Keep in mind, your student loans are not going away – you’re just reshuffling that debt. While it can feel like a relief to have fewer payments every month, it’s important to understand that you aren’t making any significant improvement to your financial situation.

A student loan cash-out refinance is best for borrowers with good credit who are in a secure financial situation. That way, if you fall on hard times financially you won’t be putting your home and your family’s livelihood at risk.

If you’re not sure if this is the best option for you, you might want to speak to a mortgage expert before moving forward. This person can explain your options to you and help you identify what your next steps should be.

Apply for a Mortgage with Quicken Loans®

Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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