If the burden of student loans is getting you down, did you know it’s now possible to roll that debt over into your mortgage? Today, we’ll give you a simple overview of the logistics of refinancing your student debt with this type of reshuffling. You can then determine for yourself if this is an angle you’d consider pursuing. As with any major financial decision, this is not something to take lightly, or without proper due diligence and professional advice.
What’s caused so many Americans to start looking at creative solutions to more efficiently pay down student debt, then?
Good Debt vs Good Debt
In 2018, student loan debt hit $1.5 trillion. As a consumer debt category, only mortgages outflank this. Mortgage debt amounts to $9 trillion according to the Federal Reserve. Student loans and mortgages are considered “good debts.” You’re investing in your own future earning potential by heading to college while you’re investing in the equity in your property when you commit to taking out a mortgage.
Although both of these categories undeniably fall under the umbrella of good debt, that’s not much consolation for the growing number of Americans finding it difficult to qualify for a mortgage. Beyond problems getting on the housing ladder, carrying high-interest student loans can also hinder the amount you can tuck away for future plans or for retirement. If you do need to reorder existing debt, you might be interested in the idea of student loan cash-out refinance but what exactly is this
What Is Student Loan Cash-Out Refinance?
Fannie Mae buys and packages the vast bulk of US mortgages then sells them on to investors. Back in spring of 2017, government-sponsored Fannie Mae teamed up with online lender SoFi and rolled out a series of changes to simplify things for prospective first-time buyers weighed down with substantial student loan debt and finding it tough to secure a mortgage.
Beyond this, they also made it possible to take on student loan cash-out refinance assuming your total mortgage debt is limited to that of a conventional loan ($424,100 to $636,150) and the new loan doesn’t exceed 80% of total property value. You’ll also need to qualify through standard underwriting procedure.
Refinancing attracts Loan-Level Price Adjustment to reflect an increased risk on the part of the lender. If you choose to roll your student loans into your fixed rate mortgage, this can be waived as long as the check goes directly from the bank to the holder of the student debt and that it’s used to pay down at least one loan in full. In place of Loan-Level Price Adjustment, borrower risk factors like a credit score or debt-to-income (DTI) ratio are used, and you can expect to pay 1% of loan value to get this arrangement in place.
So, if the idea of consolidating your old student debt, so you end up with a single monthly repayment sounds appealing, there are a few fundamentals you should ponder before going any further with this decision.
4 Factors You Should Be Aware of Before Rolling Student Loans Into a Mortgage
1) Are Potential Savings Realistic?
Theoretically, you should end up paying less interest over the lifetime of the loan if you opt for consolidation, especially if you have costly private student loans rather than the cheaper federal loans.
While the average interest rate for a fixed rate 30-year mortgage was just under 4.5% in August 2018 set against the 7.7% rates for direct unsubsidized loans, student loans are typically for far shorter terms than a 30-year fixed rate mortgage. This means you could end up paying far more in interest over time rather than saving anything at all.
That said, the average rate differential between student debt cash-out refinance and straight cash-out refinance comes out to 0.25% to 0.5% according to Fanny Mae. In real terms, you could save $4000 if you roll those payments into a 30-year-fixed mortgage. You need to crunch all the figures and scrutinize every angle to discover whether consolidation makes sense for you.
2) You’ll Pay Less Interest But Grow Your Mortgage Bill
Adding $25K of student loans to a fixed-rate mortgage at 5% over a period of 15 years will run you over $200 a month in extra mortgage repayments. This comes out to a five-figure sum of interest paid.
You could amortize this over 30 years to slash payments to less than $150, but you’ll then end up paying $25K in interest over the lifetime of your loan. Debt reshuffling is as old as the debt itself, and this is one of its harsh realities: you might win in one way when you consolidate, but you lose out in another.
3) You Could End Up In a Negative Equity Trap
Since the additional debt, you’ll shoulder will reduce the equity in your house, you could end up in a nasty negative equity trap if property values start to decline. Since you wouldn’t be able to sell your home until the loan was paid off, this could prove extremely burdensome. Think about how long you intend to stay in your home. If moving is on the horizon, this is one solid reason to think twice about rolling your student loans into your mortgage.
4) Think About Benefits You Might Lose
Any financial decision invariably involves some degree of opportunity cost. By choosing the path of consolidation, you lose out on certain elements attractive to student loans. If you’re out of work or disabled in any way, you could defer your student loans and also put a stop to interest during this period. You won’t enjoy this same protection if you opt to consolidate those loans.
You’ll also become ineligible for the federal loan forgiveness program once you reshuffle. These may not be of any real concern to you, but they are elements well worth considering so you can determine if this approach is wise for you and your circumstances. A brief snapshot of the advantages and drawbacks of this type of refinancing shows a pretty even balance.
Pros of Rolling Student Loans Into Mortgage
• You could pay less in interest while also enjoying lower payments
• Streamline your finances with a single monthly payment
• You’ll be protected from some of the downsides of student loans when it comes to bankruptcy or social security payments being garnished
Cons of Rolling Student Loans Into Mortgage
• Your home is on the line if anything goes amiss and you’re unable to service the mortgage
• You’ll dip out on student loan financial hardship benefits
• You might end up underwater with your home in negative equity
As with just about every business decision, the answer here is not straightforward. While turning your student debt into mortgage debt might very well cut the interest rate and payments in some cases, you’ll also end up without the standard protection of any federally guaranteed student loans. If you’ve got substantial home equity and equally sizeable student debt, you should undoubtedly consider at least exploring student loan cash-out refinance.
Ultimately, though, while debt reshuffling can make sense and you might feel relieved, you’ll also be running counter to the goal of home ownership by reducing equity by the amount of your student loans, so it’s not a decision to rush into.