Mortgages and student loans are among the two most common types of consumer debts in the U.S. Per the Federal Reserve, home loans total around $17.05 trillion, while total student loan debt sits around $1.60 trillion.
Since many borrowers have student loans from multiple loan servicers, rolling student loans into your mortgage could be tempting. Doing so will result in fewer monthly payments. But there are several factors to consider before moving forward with this strategy.
Can You Roll Student Loans Into A Mortgage?
You can roll your student loans into your mortgage if you’ve built enough home equity. But just because you can doesn’t necessarily mean you should. Here’s what to know and why this approach may not be the best solution for consolidating debt.
You have three options to roll your student loans into your mortgage.
1. Cash-Out Refinance
You can use a cash-out refinance to pay off student loan debt. With this type of refinance, you use your home equity to refinance your existing mortgage into a new, larger loan. You can then take the difference between your former loan and the new mortgage in cash and use those funds to repay your student loan balances.
2. Fannie Mae Student Loan Cash-Out Refinance
The Fannie Mae Student Loan Cash-Out Refinance works similarly to a traditional cash-out refinance you’d complete with your chosen lender. But this option comes with fewer fees than a traditional cash-out refinance, and Fannie Mae pays your loan servicer directly. This service can save you the extra step of paying your loan servicer on your own.
3. Home Equity Line of Credit (HELOC)
A HELOC or home equity loan can also pay off your student loans. With a HELOC, you’ll get a credit line you can draw from, generally for a 10-year period. During the draw period, you typically make interest-only payments. At the end of that period, you’ll enter the repayment period, which often ranges from 5-20 years, and you’ll need to repay the amount you’ve borrowed with interest.
Unlike a HELOC, a home equity loan lets you borrow a lump-sum amount against your home’s equity. You can then use those loan proceeds to repay your student loan debt.
Pros and Cons of Rolling Student Loans Into Your Mortgage
There are benefits and drawbacks to rolling student loans into your mortgage. Here’s what to know.
Pros
- Fewer monthly payments: Using your home equity to pay off your student loans could result in fewer monthly payments, making it easier to manage your finances.
- Potentially lower interest rate: If you have high student loan interest rates, it could reduce the interest rate on payments, depending on if you have an excellent or good credit score and other factors
- Tax implications: It is possible to write off some/all of the interest paid on mortgages
- Potentially lower payments: If you get a lower interest rate and a longer term, you could benefit from lower monthly payments.
Cons
- Your home is collateral: Your house becomes collateral when you borrow against it, which means if you miss payments, your lender could seize your home.
- Reduced equity: By taking a cash-out refinance, HELOC, or home equity loan, you’ll reduce your total home equity. This could mean a lower profit if you decide to sell.
- Qualification requirements: It can be challenging to qualify for a cash-out refinance. You’ll likely need good or excellent credit and need to meet other criteria.
- More interest: Depending on your student loan rates and the current interest rate environment, you could get a higher interest rate if you go this route or pay more interest over time with a longer loan term.
- Fees: You’ll generally pay closing costs if you opt for a cash-out refinance, HELOC, or home equity loan. These costs can get expensive and may be around 2%-5% of the total amount borrowed.
- Loss of benefits: If you roll your federal student loans into your mortgage, you’ll lose access to income-driven repayment plans and other potential benefits, like student loan forgiveness.
- No student loan interest deduction: If you fall within certain income guidelines, you can deduct up to $2,500 on your taxes or the amount of interest you paid in a year, whichever is less.
Should You Roll Student Loans Into Your Mortgage?
When rolling your student loans into your mortgage, the negatives generally outweigh the positives. While you might get a lower monthly payment, you’ll likely have a higher interest rate in the current rate environment. You’ll almost certainly pay more interest over time, and your home will be on the line if you default on your payments.
Those struggling to manage their student loan debt should look at other alternatives before borrowing against their home.
Alternative Refinance Options
- Refinancing with a private lender: There are certain benefits of student loan refinancing with a private lender, though you’ll sacrifice potential federal student loan benefits. Still, refinancing could be worth it if you get a lower or comparable rate or an extended term that makes your monthly payments more manageable.
- Loan forgiveness programs: Depending on your employer or profession, you might qualify for specific federal loan forgiveness programs. For instance, individuals in eligible public service roles could get their student loans forgiven after making 120 qualifying monthly payments.
- Employer repayment assistance programs: Certain companies offer student loan repayment assistance as an employee benefit. Employers can provide up to $5,250 per year as a tax-free benefit for employees.
Speak With ELFI To Understand Your Refinance Options
If you decide that refinancing your student loans with a private lender is wise, ELFI offers competitive refinancing options. You may reduce your payments by refinancing and benefit from fewer monthly payments to manage. Learn more about student loan refinancing with ELFI.
