How a Student Loan Cash-Out Refinance Works for Homeowners
If you're considering cash-out refinance, it's important to consider the pros and cons. This article will break down what you need to know.
If you have student loan debt, you may be interested in finding creative ways to repay it. A student loan cash-out refinance is one option available to you.
A cash-out refinance isn't available to everyone, though, and there are pros and cons to consider before you refinance to pay off student loans. Here's what you need to know.
What is a student loan cash-out refinance?
A student loan cash-out refinance actually involves taking out a new mortgage loan to pay off your existing one. But the catch is you borrow more than you owe on your current home loan. You then use the added proceeds from the bigger loan to repay some or all of your student debt.
How does a student loan cash-out refinance work?
In order to qualify for a student loan cash-out refinance loan:
- You must be a homeowner with an existing mortgage.
- You must have sufficient equity in your home (which means your home must be worth more than you owe on it).
- You must have the financial credentials to qualify for a cash-out refinance mortgage loan, which includes proof of income and a good credit score.
Generally, a cash-out refinance loan makes sense only if you can reduce the interest rate on your current mortgage loan. Otherwise, you'd be making your debt payoff on your home loan more expensive over time.
If you can qualify for a mortgage loan at a competitive rate, you can borrow up to a certain percentage of your home's value (usually up to 80%). If you are able to borrow more than it costs to repay your current loan, you can use the difference to pay back your student loans.
Once you've completed the process, you'll have a new mortgage loan and, if you've fully repaid your student loan debt, will have just one monthly payment to make.
What is a SoFi cash-out refinance loan?
Many different mortgage lenders offer cash-out refi loans. You do not have to choose a lender that specifically markets a student loan cash-out refinance program. That's because lenders typically don't care what you do with the money you get back with a cash-out refinance. You can use it to repay student loans if you want or to improve your home and pay down other debt.
However, there is a specific Fannie Mae feature called a student loan cash-out refinance. And SoFi is a partner lender that offers this specific loan. If you choose this option, there are additional requirements to meet. For example, the proceeds from the cash-out refi must be paid directly to the lender, and your student loan must be repaid in full.
Should you refinance to pay off student loans?
A student loan cash-out refinance may seem like an attractive option. But before you decide whether it's a good idea, you should make sure to answer a few key questions.
Can you qualify for a competitive refinance rate?
If you cannot qualify for a new loan at a lower rate than your current mortgage loan, you will make repaying your home loan more expensive. Likewise, if the interest rate on your cash-out refinance loan is higher than the rate on your student loans, then you'd be making payment more expensive.
Do you have enough equity in your home?
Generally, lenders don't like the combined balance of your mortgage loan to exceed 80% of what your home is worth. So, you will need to make sure you have enough equity to qualify for a large enough cash-out refinance loan to pay back your student loans as well as pay your existing mortgage in full.
Say, for example, you owed $200,000 on a $350,000 home. The maximum many lenders would allow you to borrow is $280,000. You would be left with $80,000 in this scenario to repay your student loans. But if you owed $300,000 on your current home loan and your house was worth $350,000, you might not even be able to refinance for enough money to pay off your current home loan, much less your student loans too.
Now, some lenders do allow you to break this 80% rule and borrow a larger percentage of the value of your home. But this will typically mean you must pay private mortgage insurance, which protects the lender but adds to your monthly costs.
What are the pros and cons of a student loan cash-out refinance?
The big benefits of a cash-out refinance loan include the following:
- You may be able to reduce your interest rate and total borrowing costs.
- You can consolidate debt and simplify repayment.
- You may be able to make student loan interest tax deductible if your income is too high to claim the student loan deduction (mortgage interest on loans up to $750,000 is deductible regardless of income if you itemize on your taxes).
But here are some of the biggest disadvantages:
- You're putting your home at risk.
- You're converting unsecured debt (student loan debt) into secured debt (a mortgage).
- You could make total loan payoff costs more expensive, even if you reduce your interest rate, if you make your loan or mortgage repayment time longer.
- If you refinance federal loans, you would need to give up borrower benefits exclusive to this type of debt, such as loan forgiveness options, flexible income-driven repayment schedules, and generous forbearance and deferment policies.
- Mortgage closing costs could be expensive, as they often total several thousand dollars.
You need to carefully consider these downsides before you refinance to pay off student loans.
Alternatives to a student loan cash-out refinance
There are other ways to reduce your student loan interest rate and make repayment easier that do not involve a student loan cash-out refinance that puts your home in jeopardy.
For example, you could consider a private student loan refinance loan. That would allow you to refinance and change the terms of your existing student loan debt without your mortgage being impacted at all. Juno can help you qualify for very competitive rates for a student loan refinance loan, as we get groups of borrowers together and harness the power of collective bargaining to make lenders compete for their business.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.
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