Do you have a house and student loans? A student loan cash-out refinance mortgage might make managing your student debt a little easier.
With a student loan cash-out refinance mortgage, you refinance your home and use your home’s equity to repay your student debt. In other words, the money from the refinanced home loan pays off your current mortgage and some or all of your student debt. When done properly, this strategy saves you money and makes your debt easier to manage.
Below, we’ll take a closer look at cash-out refinancing for student loans, including some pros and cons.
What is a Student Loan Cash-Out Refinance?
A cash-out student loan is a refinance mortgage product that’s worth more than what you currently owe on your existing mortgage. First, this new cash-out refinancing loan pays off what you owe on your mortgage. Then, any remaining money goes to you or directly to your loans.
Student Loan Cash-Out Refinance Programs
Banks and financial institutions offer mortgage products that help borrowers refinance their homes and pay off some or all of their student loans.
Fannie Mae Student Loan Solutions
Fannie Mae’s student loan cash-out refinance program, called Student Loan Solutions, is a cash-out refinance program that pays your student loan servicer directly. It allows homeowners to refinance their homes and to borrow extra cash (based on available home equity) to pay off student loans. Instead of going into your bank account, the extra money first goes to your loan servicer.
To qualify, you must:
- Have a maximum 80% loan-to-value ratio
- Receive at least $2,000 cashback after the student loan(s) is paid off
- Pay off at least one student loan (you cannot just pay off part of a loan)
Fannie Mae’s Student Loan Solutions program is available from participating lenders. Ask your local bank or credit union if they participate.
Other Banks & Financial Institutions
Most banks and financial institutions that offer mortgage refinancing also offer cash-out refinance mortgages. With these programs, you can use the extra cash you borrow for any purpose. The money goes directly to you, so you can choose to use it to pay off your student loans, or you could use it for home renovations, paying off credit cards, investing, etc.
How Does Cash-Out Refinance for Student Loans Work?
The steps to follow for a cash-out refinance are as follows:
1. Calculate Your Equity
Not every homeowner is eligible for a cash-out refinance. You need sufficient home equity to qualify—usually at least 20 percent. Zillow’s home-value estimation can give you a decent idea of your home’s value to help you determine equity.
Home Equity Calculation
Home Equity = Home Value – Mortgage Balance
For example, if your home is worth $200,000, and you still owe $140,000 on your mortgage, your home equity is $60,000.
Home Equity Percentage Calculation
Home Equity Percentage = 100 x (Home Equity / Home Value))
Given the same scenario above, your home equity percentage is:
100 x ($60,000/$200,000) = 30%
2. Decide What Program You Want to Use
Search online or reach out to local banks and credit unions in your area to see which offer Fannie Mae’s Student Loan Solutions program or another cash-out refinance program. Apply to the program that offers the best rates based on your financial situation.
3. Get Approved & Close
After you apply, the mortgage company will need to run a hard credit check and appraise your home to determine its value. If it’s decided that you have enough equity in your home, a strong enough credit score, and the financial means to repay the loan, you’ll get approved.
Upon closing, the new refinanced loan will pay off your existing home loan in its entirety. Any leftover money from the cash-out refinance will go to you or directly to your student loan servicer.
Pros & Cons of Cash-Out Refinance for Student Loans
A cash-out refinance isn’t the right move for everyone. Lumping some of your major debts together has its advantages, but it also means giving up certain tax incentives and borrower protections. Read on to learn more about the pros and cons of student loan cash-out refinancing.
Pros
Simplifies Repayment
Instead of making two or more payments for your mortgage and student loans, you’d now only have one. Of course, that’s assuming you use the extra cash to pay off all of your existing student loans.
Can Reduce Your Student Loan Interest Rate
With a cash-out refinance, you might be able to get a lower rate than you could if you just refinanced your student loans. Banks offer lower rates on mortgages because a mortgage is a secured debt. A house can become more valuable over time, and if you fall behind on payments, the bank can sell your home to recoup the debt. With student loans, there’s no valuable asset to seize if you stop making payments.
If you aren’t able to get a lower rate on your student loans with a cash-out refinance, look into private student loan refinancing instead.
Your Student Loan Interest Stays Tax Deductible If You Itemize
You won’t be eligible for the student loan interest rate deduction anymore, but if you itemize, you can deduct any mortgage interest paid on loans up to $750,000.
Cons
It Could Make Repaying Your Student Loans More Expensive
If your student loans have a 10-year repayment term, lumping them into your 30-year mortgage could increase the amount of interest you pay over the life of the loan. Plus, you’d be stuck with your student debt for much longer.
You Lose Student Loan Benefits & Protections
When your student loans become part of your mortgage, you’ll lose borrower benefits and protections. Federal student loan borrower protections include flexible income-based repayment plans, student loan forgiveness, death and disability discharge, academic deferment, and economic hardship forbearance.
Your private lender, especially if it’s a top private student loan lender, likely offers some protections and perks too. These might include an autopay discount, death and disability discharge, or temporary forbearance.
Make sure you’re comfortable giving up any and all borrower protections you have from your student loan lenders.
Your Home is Now at Risk
With a student loan cash-out refinance, your mortgage now includes your student loans. If you can’t pay your mortgage (and thus your student loans), the bank can place your home in foreclosure. When your mortgage and student loans are separate, missing payments on your student loans doesn’t place your home in jeopardy.
You Can’t Claim the Student Loan Interest Deduction Without Itemizing
The student loan interest payment deduction is an above-the-line deduction, so you can claim it even if you don’t itemize. When you do a student loan cash-out refinance, your student loan interest is now mortgage interest. Mortgage interest is only deductible if you itemize, which only 30% of Americans do.
Should You Consider a Cash Out Refinance for Student Loans?
A cash-out refinance for student loans isn’t for everyone, but it can help borrowers take control of their student debt. When deciding if it’s right for you, it’s helpful to first evaluate both types of debt separately. See what interest rates you’d likely qualify for with private student loan refinancing and with mortgage refinancing. Compare those rates and terms to a student loan cash-out refinance arrangement.
For more information on student loan refinancing, check out these articles:
- The Top 11 Student Loan Refinancing Mistakes
- Can You Refinance Student Loans? A Guide to Student Loan Refinancing
- Refinancing Your Student Loans? Consider Credit Union Student Loans
- SoFi Review – Student Loan Refinancing and Consolidation
- LendKey Student Loans and Refinancing: Low Rates and Friendly Service
- Can I Refinance My Student Loans After a Consolidation?
