Should You Pay Off Your Student Loans With Mortgage Refinance?

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Those who follow the news of The Federal Reserve may be aware their last decision keep interest rates low, which has impacted everything since mortgages to your savings account. If you are in debt of any kind, you may be considering options to lower your rates.

With mortgage interest rates at historic lows, you can even ask yourself if you should tap into your home equity to pay off higher interest rate debt, including your student loans. This might be a good option if you qualify for a student loan repayment refinance, who uses home equity to pay off student loans. Here’s what you need to know before you apply.

How does student loan refinancing work?

If your home is worth more than your mortgage, you have equity in your home and you may be eligible to borrow against that value and use the money. for different purposes. A student loan cashing refinance involves applying for a larger mortgage to cover your mortgage balance alongside one of your student loans.

To qualify for a Fannie Mae-backed student loan cash-out refinance, you must hold at least 20% equity in your home to qualify and you must repay at least one student loan in full in the process. (You can see all of Fannie Mae’s eligibility requirements, including acceptable credit scores and debt-to-income ratios.here.)

Many lenders do not advertise student loan repayment refinances, although SoFi is a die better known exceptions. You can also shop online at popular mortgage comparison websites.

The Risks of Cash Refinancing a Student Loan

The biggest risk in refinancing a student loan is increasing your mortgage balance. While you can get a lower interest rate, you can also increase your monthly mortgage payment. This can be particularly risky in the midst of the pandemic and a faltering economy. You can also reduce the equity in your home, which could limit your borrowing options in the future.

You should also consider refinance closing costs, and how long will it take you to break up even on the transaction. If you don’t have a large student loan balance, spending thousands of dollars on closing costs may not be worth it.

If you are among the most creditworthy borrowers (high credit rating, low debt ratio and a stable job), you can explore less risky options, such as refinancing your student loans themselves. An advantage of this option: you will not lose your tax deduction for student loan interest.

There are big risks in refinancing federal student loans to private student loans, although.

The Risks of Refinancing Your Federal Student Loans

If you are thinking about refinancing federal student loans, there are some additional risks you should consider. You may be forgoing valuable protections against borrowers, such as last break on federal payments until 2020 — or future postponement or forbearance opportunities.

Another major drawback is the loss of access to Public service loan remission or more flexible and income-oriented repayment plans. With so much at stake, you should ask yourself whether maintaining a lower interest rate is worth it, especially in times of economic uncertainty.