Should You Repay Your Student Loan With Mortgage Refinancing?
Those following the news from the Federal Reserve may be aware of their latest decision to keep interest rates low, which has impacted everything from mortgages to your savings account . If you have any debts, you may be looking for ways to lower your rates.
Given that mortgage interest rates are at historically low levels, you may even wonder if your home’s equity should be used to pay off higher interest debt, including your student loans. This can be a good option if you are eligible for a student loan cash disbursement refinance that uses home equity to pay off the student loan. Here’s what you need to know before applying.
How Student Loan Cashing Refinancing Refinancing Works
If the value of your home is higher than your mortgage, you have equity capital and you can qualify for a loan at that value and use the money for various purposes. Student loan cashing out refinancing involves applying for a larger mortgage loan to cover your mortgage balance along with one of your student loans.
To be eligible to refinance a Fannie Mae-backed student loan repayment, you need to own at least 20% of the home equity in your home, and you must fully repay at least one student loan in the process. (You can see Fannie Mae’s full eligibility requirements – including acceptable credit ratings and debt-to-income ratios – here .) Many lenders do not advertise student loan cashing refinancing, although SoFi is one of the more notorious exceptions . You can also shop online at popular mortgage comparison sites.
Student Loan Cashing Refinancing Risks
The biggest risk of refinancing student loan cash payments is to top up your mortgage balance. While you can lock in a lower interest rate, you can also increase your monthly mortgage payment. This can be especially risky in a pandemic and volatile economy. You can also reduce your equity capital, which may limit your future borrowing options.
You should also consider the cost of closing refinancing and the time it takes to break even on the deal. Unless you have a large student loan balance, spending thousands on closing expenses might not be worth it.
If you are one of the most creditworthy borrowers (high credit rating, low debt-to-income ratio, and stable employment), you can look into less risky options like refinancing your student loans yourself. One of the benefits of this option is that you will not lose your student loan interest tax deduction .
However, refinancing from federal to private student loans comes with some big risks.
Refinancing Risks of Federal Student Loans
If you are thinking of refinancing federal student loans, there are some additional risks to consider. You may be abandoning valuable borrower protections – such as the most recent suspension of federal payments until 2020 – or future deferral or deferral options.
Another major drawback is the loss of access to government service loan forgiveness or more flexible income-based repayment plans. With so much at stake, you should consider whether to charge a lower interest rate, especially in times of economic uncertainty.