What do student loan balances and home prices have to do with one another? If you’re a homeowner and have built equity in your house — and with sky-high home prices right now, you likely have some equity established — you have a potential tool for repaying your student loans with a cash-out refinance mortgage. Here’s what you should know about student loan cash-out refinance loans.
What Is a Student Loan Cash-Out Refinance Mortgage?
If you have multiple forms of debt, such as several student loans and a mortgage, keeping track of your payments can be confusing and overwhelming. You may be interested in combining mortgage and student loan payments to simplify your finances and to get one easy monthly payment. If you’re thinking about consolidating your mortgage with your student loans, there is a way to do it: a cash-out refinance mortgage. A cash-out refinance loan is a type of mortgage for people that have already purchased a house with a home loan. With a cash-out refinance loan, you take out a new loan for more than you owe on your existing mortgage. You use the loan to pay off your old mortgage, and the remaining amount is disbursed to you as a lump sum to use however you want — such as paying off your outstanding student loans.
An Example: Combining Mortgage and Student Loans
Student Loan Cash-Out Refinancing Formula
Current Mortgage Balance + Student Loan Debt = Cash-Out Refinance Loan Amount
To show you how a student loan cash-out refinance loan works, consider this example: Sharon bought a home that is worth $250,000. So far, she’s paid off $100,000 of her mortgage, and she owes $150,000 on her loan. She also has $30,000 in student loans left over from graduate school. Because Sharon has paid off a chunk of her mortgage, she has built equity in her home. With cash-out refinancing, she can apply for a loan covering her existing mortgage and student loan debt. She applies for a cash-out refinance mortgage of $180,000 — $150,000 to pay off the remainder of her home loan and $30,000 to pay off her student loans completely. Going forward, Sharon has just one debt account: her new mortgage. Her student loans are paid in full, so she’ll have just one easy monthly payment to remember.
Pros and Cons of Refinancing Your Mortgage to Pay off Student Loan Debt
“Can I consolidate student loans with mortgage debt?” It’s a common question. While it’s possible to combine your student loans and mortgage payments, it’s not always the best idea. Before shopping for a new mortgage, consider these pros and cons:
Pros
- You could get a lower interest rate: Cash-out refinance mortgages have the same interest rates as traditional mortgages. As of August 19, 2021, the average interest rate on 30-year fixed-rate mortgages was 2.86% — significantly lower than the rates on most student loans. Taking advantage of a cash-out refinance loan could allow you to essentially refinance your student loans at a much lower rate.
- You may reduce your monthly payments: When you use a cash-out refinance loan, you can select a new loan term. With mortgages, you can have as long as 30 years to repay your loan. By extending your loan term, you could lower your total monthly payments.
- You may be eligible for the mortgage interest deduction: After combining your student loans and mortgage together, you’ll no longer qualify for the student loan interest tax deduction. However, you may be eligible for the mortgage interest deduction. You can generally deduct the home mortgage interest on the first $750,000 of indebtedness. Plus, the mortgage interest deduction doesn’t have an income limit, so you can likely take advantage of it even if you made too much money for the student loan interest tax deduction.
Cons
- You will transfer unsecured debt to secured: While student loans are unsecured, mortgages are not. When you use a cash-out refinance loan to pay off your student loans, you will transfer unsecured debt to secured debt, and your house acts as collateral. If you fall behind on your payments, the bank can foreclose on your home.
- You’ll lose federal student loan benefits: If you have federal student loans and use a cash-out refinance mortgage to pay them off, you’ll no longer be eligible for federal loan benefits like forbearance or loan forgiveness.
- You have to pay closing costs: Just like when you took out your original mortgage, you’ll have to pay closing costs when you get a cash-out refinance loan. Typically, closing costs are 2% to 5% of the loan amount.
Instead of Combining Mortgage and Student Loan Payments, Consider Student Loan Refinancing
Now that you understand how student loan cash-out refinance loans work, you may be rethinking using one to tackle your education debt. If you’d like to keep your loans separate from your mortgage — so that your student loans stay unsecured — another option to consider is student loan refinancing. If you have good credit and a steady source of income, you could refinance your student loans and secure a lower interest rate. You can also change your repayment term so you can get a lower monthly payment or pay off your loans faster. Student loan refinancing interest rates are quite low right now, so you could qualify for a better rate than you have now — without using your home as collateral. You can use ELFI’s Find My Rate tool to get a rate quote without affecting your credit score.
