Rolling Student Loans Into A Mortgage: The Pros, Cons And Alternatives

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 nearly impossible. Many graduates consider rolling their student loans into their mortgage to help manage their 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 could 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 a decent credit score 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 all at once. The key to consolidating student loans with your mortgage is to take advantage of low mortgage refinance rates (if possible) and simplify your monthly finances.

What To Consider Before Consolidating Student Loans Into A Mortgage

Before you roll your student loans into a mortgage, it’s essential to understand the pros and cons of increasing your mortgage loan balance.

Benefits

Advantages of rolling your student loans into a mortgage include the following:

• Lower number of 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 one too many things on your plate. When you consolidate student loans into a mortgage, you have just one payment to manage, reducing the risk of a late or missed payment.
• Reduced interest rate: If you have decent credit and few other outstanding debts, you may qualify for a lower interest rate than you currently 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 tax-deductible, but when you wrap it into the loan, you may be able to deduct it. Talk to your tax advisor about your options.
• Reduced monthly payment amount: Not only will lowering the interest rate save you money over the life of the loan, but it may lower the amount of your monthly payment. With a lower payment, you may have more breathing room in your budget and can potentially even make extra payments toward the mortgage.

Drawbacks

There are also several disadvantages to consolidating your student loan debt. As a result of rolling your student loans into a mortgage, you may:

• Risk losing your home: Rolling your student debt into your mortgage can make your once unsecured loans secured. If you default on the loan because the payments are higher, you could lose your home since your house is the collateral for your mortgage.
• Lose federal protections on your student loans: If you had federal student loans, you might have other payment options or 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.
• 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.
• Find it difficult to qualify for: A cash-out refinance requires a decent minimum credit score and low debt-to-income ratio. Since lenders take a more significant risk lending you additional 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 an easy decision. 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. If you stretch out the loan 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 does make sense, you can use a 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.

Steps For Rolling Student Loans Into A Mortgage

The process to roll student loans into a mortgage is simple:

1. Choose a conventional or FHA cash-out refinance, or the Fannie Mae Student Loan Cash-Out Refi.
2. Apply for the loan, disclosing your income, assets, credit score, current home value and current balance of your mortgage and student loans.
3. Provide qualifying documents to prove you can afford the higher loan amount.
4. Close on the loan.
5. 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, your 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 on-time payments, usually 10 – 20 years’ worth, 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 mortgage has a great interest 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 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. 

Apply For 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 a salary, but if you can get your student loans paid off, it’s like giving yourself a raise.

The Bottom Line

If you’re suffocating in student loan debt, rolling student loans into your mortgage may seem ideal, if you can get a lower rate. It’s not the best or the only option, though. Before you wrap your student loans into your mortgage, look at your other choices.

Are you interested in moving forward with rolling your student loans into a mortgage? Learn more about how refinancing your mortgage to pay off debt works to see if refinancing is the best way to consolidate your student loans.