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Rolling Student Loans Into a Mortgage

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If you’re a homeowner with student loan debt, you may be thinking about rolling your student loans into your mortgage. With home values rising steadily over the past five years, you may be able to pay off your student loan balances and still have home equity left over. However, It’s best to know the pros and cons of this strategy to make sure rolling student loans into a mortgage is the best plan for you.

Can I combine my student loans and mortgage?

Yes, it is possible to combine your student loan debt and mortgage — as long as you have enough home equity. You can calculate your home equity by subtracting how much you owe from your home’s value.

For example, if your current loan balance is $250,000 and your home is worth $350,000, you have $100,000 worth of home equity ($350,000 – $250,000 = $100,000). However, in most cases, you won’t be able to access all of your available equity because of loan-to-value (LTV) ratio limits, which typically cap you at borrowing no more than 80% of your home’s value.

Using the 80% limit on the example above reduces your available equity to $30,000. Here’s how the math works:

Calculate your maximum loan amount   $280,000 (80% of $350,000)

Subtract the current loan balance       – $250,000

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The result is your available home equity $30,000 

In this example, you’d have $30,000 to apply to your student loan balances, leaving you with $70,000 of home equity after the refinance is complete ($100,000 – $30,000 = $70,000 in remaining equity).

Pros and cons of rolling students loans into a mortgage

ProsCons
Your interest rate will be lower than most student loan ratesYou’ll make less profit when you sell your home
You’ll have only one monthly paymentYou could lose your home to foreclosure if you can’t afford your payments
You may lower your total monthly paymentsYou’ll lose the ability to defer loan balances if you decide to go back to school

How to roll student loans into a mortgage

There are several different ways to combine your student loan balance with your mortgage. We’ll cover the most common loan programs you can choose from.

Cash-out refinance

A cash-out refinance allows you to borrow more than you owe on your home and pocket the difference in “cash.” There are several types of cash-out refinance programs you may use to roll your student loan debt into your mortgage:

  • Fannie Mae student loan cash-out refinance. Fannie Mae is a government-sponsored enterprise (GSE) that supports the market for conventional mortgages. The Fannie Mae student loan cash-out program allows you to borrow up to 80% of your home’s value and use the extra cash to fully pay off at least one of your student loan balances.
  • Conventional cash-out refinance. If you don’t have enough equity to pay your entire balance off, a regular conventional cash-out refinance permits partial student loan payoffs up to an 80% LTV ratio.
  • FHA cash-out refinance. Borrowers with credit scores as low as 500 may be able to qualify for a cash-out refinance backed by the Federal Housing Administration (FHA) for up to 80% of their home’s value. The credit score minimum is much lower than the 620 minimum score conventional loans require, but the mortgage insurance expenses are much higher.
  • VA cash-out refinance. Eligible military homeowners can borrow up to 90% of their home’s value and use the proceeds to pay off their student loans with a VA cash-out refinance backed by the U.S. Department of Veterans Affairs (VA).

Home equity loan

A home equity loan allows you to borrow a lump sum — usually at a fixed rate — that you can use to pay down, or even pay off, your student loan balance. Home equity loans are considered “second” mortgages, since they’re secured by your home behind your current or “first” mortgage.

Home equity loan rates are typically higher and the terms typically shorter than first mortgage cash-out refinance programs. But if you’re happy with the interest rate on your first mortgage, consider replacing your student loan with a home equity loan.

Home equity line of credit

A home equity line of credit — HELOC for short — is also a second mortgage, but it works more like a credit card secured by your home. With a HELOC, you can draw as much or little as you need (up to your credit limit) for a set time called a draw period, and you’re often are allowed to make interest-only payments during that time.

When the draw period ends, the balance is paid in equal installments for the remainder of the loan term. HELOC rates are typically variable — which can make them less attractive for paying off student loans, since over time the interest rate could end up more expensive than your current student loan rate.

Alternative student loan consolidation options

  • Loan forgiveness. Depending on your situation, you may be able to have your student loans forgiven. There are programs that include forgiveness if you work in a government or nonprofit organization, or have taught in a low-income elementary or secondary school or an educational service agency. Check out the Federal Student Aid site for more information.
  • Student loan refinance. You could opt to refinance your student loans separately from your mortgage. There are a number of student loan refinance comparison sites that allow you to compare offers from several different lenders at once. Rates and terms will vary, depending on your credit score and chosen loan term.
  • Employer repayment assistance. Find out if your employer offers any student loan repayment assistance programs. Some company programs pay a monthly amount toward your student loan balance for a set time, then contribute a lump sum after a specific work anniversary.
 

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