Rolling Student Loans Into A Mortgage: The Pros, Cons And Alternatives
Sam Hawrylack6-minute read
April 29, 2021
Students today leave college with an average debt load of $29,000. Balancing student debt on top of a mortgage and other monthly obligations can feel near impossible. Many graduates consider rolling their student loans into their mortgage to help with the debt.
While buying a house with student loan debt is possible, it’s not always the best idea to roll the debt into your mortgage. Like any financial decision, there are pros and cons to both sides. If you’re thinking about confronting your student loan debt, read on to determine if rolling student loans into a mortgage is a good idea.
Can You Roll Student Loans Into A Mortgage?
Rolling student loans into a mortgage is possible with the right loan and enough equity in the home. Equity is the difference between your home’s value and your current outstanding mortgage balance. It’s the money you’d walk away with if you sold your house today.
Rather than selling your house, you can keep it and roll your student loan debt into it, making it easier to manage your finances and maybe even save money on interest charges.
To qualify, you’ll need decent credit and proof that you can afford the higher loan payment that rolling debt into your mortgage creates.
Keep in mind, rolling student loan debt into a mortgage increases your mortgage payment but eliminates (or lowers) your other debt payments depending on whether you move the entire amount into your mortgage or just some of it.
Homeowners have a few options to roll student loans into a mortgage, including a cash-out refinance to consolidate student and mortgage debt or Fannie Mae’s Student Loan CashOut Refi program.
The reality of the situation is you’re ‘reshuffling’ the debt, and you aren’t paying it off. The key to consolidating student loans and a mortgage is to take advantage of low mortgage rates and simplify your monthly finances.
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What To Consider Before Consolidating Student Loans Into A Mortgage
Before you consolidate your student loans into a mortgage, it’s essential to understand the pros and cons of increasing your mortgage loan balance.
Reduce monthly payments: Having too many monthly payments to manage can get overwhelming. It’s easier to miss a payment or budget incorrectly when there are too many things for you to manage. When you consolidate student loans into a mortgage, you have one payment to manage, reducing the risk of a late or missed payment.
Reduce interest rate: If you have decent credit and not too much other outstanding debt, you may qualify for a lower interest rate than you pay on your student loans. Lowering the interest rate on loans could save you thousands of dollars over the life of the loan.
Tax benefits: You may be able to write off some or all of the interest paid on your mortgage. Student loan interest isn’t always deductible, but when you wrap it into the loan, you may be able to deduct it. Talk to your tax advisor about your options.
Lower your monthly payment: Not only will lowering the interest rate save you money over the life of the loan, but it may lower the monthly payment. With a lower payment, you have more breathing room in your budget and/or can make extra payments toward the mortgage.
Risk losing your home: Rolling your student debt into your mortgage makes your once unsecured loans secured. If you default on the loan because the payments are higher, you could lose your home.
Lose federal protections on your student loans: If you had federal student loans, you might have other payment options/protections that lower your payments or even forgive a portion of your loan balance. If you refinance the debt into your mortgage, you lose that protection. You also lose the option to put your student loans into forbearance.
Pay more interest over the life of the loan: Even with a lower interest rate, your student loans may cost more money if you stretch the debt out over a longer term.
Harder to qualify for: A cash-out refinance requires decent credit scores and low debt-to-income ratios. Since lenders take a more significant risk lending you more money, they have stricter requirements to ensure you qualify for the loan.
How To Roll Student Loans Into A Mortgage
If you’ve decided you’re ready to roll your student loans into a mortgage, here’s what you need to know.
First, make sure it makes sense to refinance your debts into your mortgage. In a low interest rate environment, it’s a no-brainer. If you have higher student loan rates, you can refinance the debt into your mortgage and save money on interest.
But this comes at a cost. First, if you’ll stretch out the term, such as a 30-year term, make sure the total interest you’ll pay won’t exceed what your student loans would have cost. To get the best interest rates and mortgage loan terms, you’ll need good credit, low debt ratios, and proof that you can handle the higher loan amount.
Then there are the closing costs. Ensure they aren’t so high that they defeat the purpose of refinancing your student loans into your mortgage.
If rolling student loans into your mortgage makes sense, you can use the traditional conventional, or FHA cash-out refinance or the Fannie Mae Student Loan Cash-Out Refi loan.
In a traditional cash-out refinance (conventional or FHA cash-out refinance), you borrow enough money to pay off your student loan, receive the proceeds and pay the student loans off yourself. You have a new, higher mortgage loan and only one payment each month.
With the Fannie Mae Student Loan Cash-Out Refi, the premise is the same, but to qualify, you must pay off at least one student loan in full, and the lender must pay the student loan servicer directly rather than giving you the proceeds. The only cash you may receive in hand is the lesser of 2% of the loan amount or $2,000.
Rolling Student Loans Into A Mortgage
The process to roll student loans into a mortgage is simple:
- Choose a conventional, or FHA cash-out refinance or the Fannie Mae Student Loan Cash-Out Refi
- Apply for the loan, disclosing your income, assets, credit score, current home value, and current balance of your mortgage and student loans
- Provide qualifying documents to prove you can afford the higher loan amount
- Close on the loan
- If it’s a cash-out refinance, you’ll receive the loan proceeds and directly pay your student loan servicers. Or, if it’s a Fannie Mae Student Loan refinance, the lender will pay the student loans off for you
Alternatives To Consolidation
If consolidating your student loans into your mortgage doesn’t make sense, or you don’t want to refinance your first mortgage, there are a few alternatives.
Apply For Loan Forgiveness Programs
Federal student loans may be eligible for federal loan forgiveness programs, especially if you work for a non-profit organization or in a high-need area. To qualify, you’ll need to refinance your loan into an income-based repayment plan, which lowers your monthly payments to a specific percentage of your income.
Once you make a certain number of payments, usually 10 – 20 years, your loan gets forgiven, which means you don’t have to pay the balance of any loan amount left.
Refinance Student Loans Separate From Your Mortgage
If your first mortgage has a great rate or you don’t want to increase the balance, you can refinance your student loans with a federal student loan refinance program or even with a private lender.
If you use a private lender, make sure you won’t use any federal benefits. Once you refinance your federal loans, you lose all protections. Talk to a financial advisor before refinancing your loans to make sure you’re making the right choice.
You can also tap into your home’s equity but take out a home equity loan, leaving the first mortgage alone. A home equity loan is a second mortgage that gives you access to your home’s equity without touching your first mortgage. Rocket Mortgage does not offer this type of loan.
Repayment Assistance Through Your Employer
Many employers today offer tuition repayment assistance as a benefit. It may not seem like much of a benefit at the time since it’s not salary, but if you can get your student loans paid off, it’s like giving yourself a raise.
The Bottom Line: Don’t Risk Your Home To Pay Off Loans
If you’re suffocating with student loan debt, rolling student loans into your mortgage may seem ideal, especially with today’s low interest rates. It’s not the best or the only option, though. Before you wrap your student loans into your mortgage, look at your other options.
Sometimes it can be suitable to refinance, but only if you’re in a secure financial situation and have excellent credit. The homeowner that knows beyond a reasonable doubt that they can afford the higher mortgage payment and won’t put their house at risk is a good candidate. If not, or you aren’t sure, consider one of the alternatives, including using the benefits the federal government provides.
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