student loans and mortgage refinancing

How to Pay Off Student Loans via Mortgage Refinancing

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The problem of making student loan payments is looming over a disturbingly increasing number of Americans, but now there is a new mortgage loan refinancing program that enables borrowers to change their student loans for mortgage loans at a lower interest rate. This cash-out refinancing program is offered by the personal finance company SoFi, and backed by Fannie Mae (which is controlled by the government, as some of us may remember from the infamous financial crisis of 2008-09). While the program does offer a number of potential benefits, there are also risks to be considered.

Benefits of Paying Off a Student Loan via Mortgage Refinancing

Thanks to the student loan repayment program, a homeowner with student loans, or homeowner parents that had jointly signed student loans for their children, can obtain a cash-out refinance. SoFi pays the student debt with the extra cash, and the borrower gets a higher new mortgage loan, but at a lower interest rate.

Borrowers now have the option to choose between a loan or a real estate line of credit to pay their student debt. But because second home mortgage usually has higher interest rates than a first home mortgage, it’s often not beneficial to do so. But in the SoFi program, loans merge into a single loan with a current mortgage interest rate. This program also waives loan origination and other lender rates.

The current federal student loan interest rate is 3.76%, and for Federal Parents Plus loans or graduate or professional students is 6.31%. But in the past interest rates often were higher, so a considerable number homeowners with such debts are likely to have a higher interest rate. Private student loans issued by banks or other lenders that usually require a joint signature, usually have higher interest rate than federal loans. The average interest rate for fixed-rate-loans for a private student loan is approximately 6.5%, but the rate can be higher.

Risks & Considerations

Nevertheless, consumer rights protectors warn that exchanging student loans for mortgage loans entails risks. The lender can offer a lower rate for a new and rollover mortgage because, unlike a student loan, it is insured by a real estate property. If the borrower does not pay the mortgage,  the lender can proceed by law to evict him and take control over the house. On the other hand, when student loans are not paid, it can ruin the borrower’s credit and face financial havoc, but it is unlikely that he will lose the roof over his head.

Borrowers with federal student loans must think even more cautiously. Federal loans, unlike most private loans, come with protections like the option to postpone payments in case of unemployment, or flexible payment plans that link the monthly payment amount to their income. To refinance federal student loans into a new mortgage, you will have to relinquish those rights.

It is also advisable to think how much money you could save in the long run. You may be paying a lower interest rate, but for a longer period. The standard student loan lasts for ten years, while most mortgage loans are for 30 years (although 15-year-old loans are an option). So in the end you may overpay the amount of debt you owe currently.

In theory, borrowers with student loans, both federal and private, can benefit from student payment plans, but it could be a different story for those that have private loans. If you have federal loans that you might not be able to pay in the future, mortgage loan refinancing programs might not be for you. But then again, every situation is different.

How do I qualify to refinance a student loan via my mortgage?

The property under mortgage must have at least 20% equity in it. It means that if your home’s value is $300,000, the total mortgage may not exceed $240,000. Also, as per Fannie Mae’s requirements, your credit score cannot be below 620.

How is my student loan paid?

SoFi pays the issuer of your student loan and increases the principal on your mortgage.

Is the SoFi program available across the United States?

Currently, the program’s availability is limited to the District of Columbia and 27 more states where SoFi has an active license to issue mortgages.