If you’re a homeowner who has student debt you’d like to pay off as soon as possible, you might be in luck. Your home can now do more than just keep you warm at night. It can also help you pay off your student loans.
Consolidating your student loan debt with a mortgage refinance may be the answer you’ve been looking for.
Ryder Taff, a financial advisor with the portfolio management company New Perspectives, Inc., says, “Mortgage debt offers some of the best terms available and may make sense for your financial situation.”
Let’s find out if that’s true for you right now.
Pros and Cons of consolidating your student loans with a mortgage refinance
Compare the pros and cons to make a better decision.
- You pay less in interest and get lower payments
- You’re protected against the downsides of student loans
- You have only one payment to remember
- You may not have enough equity
- You risk losing your home
- You lose student loan financial hardship benefits
- You could become upside down with your mortgage
Let’s look a little closer at those pros and cons.
Pros of paying for your student loans with a mortgage refinance
Here are the top three benefits of consolidating your student loans with a mortgage refinance.
1) You pay less in interest and get lower payments
A lower interest rate and monthly payment is the biggest advantage to using a mortgage refinance to consolidate your student loan debt, says Jeff Hensel, sales and marketing director at North Coast Financial, Inc. “Mortgage interest rates for prime borrowers can be in the 3-5% range, while interest rates for student debt can be in the 8-10% range or higher.”
Moving student loan debt from a higher to lower interest rate can result in significant savings. Hensel says, “Going from an interest rate of 10% to 4% can provide significant savings. A fully amortized 10-year term with a balance of $50,000 will have a 4% monthly payment that’s $154.52 less than the 10% monthly payment ($660.75-$506.23). This results in a savings of $18,543.36 over the course of the loan.”
2) You’re protected against the downsides of student loans
There are potentially negative features of student loans that can be conveniently solved by consolidating the debt into a mortgage, says Sarah M. Place, president and CEO of Place Trade Financial.
She states, “Whereas student loans can’t be eliminated if you find it necessary to declare bankruptcy, mortgages can be eliminated. In addition, mortgage lenders can’t garnish your social security benefits, but those benefits can be garnished for student loans.”
3) You have only one payment to remember
If you have several student loans to pay off, it can be a challenge to keep up with all the payments. It’s easy to accidentally forget to make a payment when the list includes more than one item.
If you’re able to take that list of student loan payments and consolidate them into your mortgage, you won’t have to worry about missing any payments. You’ll only have one payment to make. This not only saves time; it also prevents you from being hit with late charges from overlooked payments.
Cons of consolidating your student debt with a mortgage refinance
Before refinancing, consider these four potential disadvantages to consolidating student loans with a refinance.
1) You may not have enough equity
“If you plan on paying off a significant amount of student loans, you need a lot of equity in your home,” says Taff. He advises, “Check with a mortgage lender first to see what is feasible in terms of cash taken out and what your interest rate might be on the new mortgage.”
2) You risk losing your home
“You’re converting an unsecured debt (student loan) into a secured debt (mortgage) when you consolidate via mortgage refinance,” says CPA Noel Dalmacio, owner of LowerMyTaxNow. He adds, “If you can’t pay your mortgage, you put your home at risk of foreclosure.”
3) You lose student loan financial hardship benefits
One of the main drawbacks of converting federal student loan debt into mortgage debt is giving up certain benefits that only federal loans offer. Several programs, including deferment and forbearance, allow you to temporarily stop paying when finances are tight.
“Consider what you’re giving up,” says Taff. “Student loans, especially government ones, come with some useful features. Most useful are the income-based repayment plans. These programs offer payments that even a 30-year mortgage may not be able to beat, and forgiveness after 20-25 years that you won’t get anywhere else.”
If you have a private student loan, they don’t usually offer the same financial hardship benefits, so a mortgage consolidation could be a particularly good idea, says Place.
4) You could become upside down with your mortgage
“When you rollover your student loans into your house via a mortgage refinance or second mortgage, there’s no new home loan to roll the loans into when it comes time to sell your house,” says Place.
“If you need to sell your house and you haven’t paid off the additional mortgage that included your student loans — and the value of your house (sale price) is less than what you owe for the mortgage — then, at closing, you’ll have to pay the difference between what you owe and what you’re receiving from the sale of the house. If you can’t do this, you won’t be able to close the sale of your home.”
The bottom line
Carefully consider if consolidating student loan debt with a mortgage refinance is right for you. Take time to analyze your current financial situation and how it could change in the near future. Remember that if you do consolidate, you’ll lose the flexible repayment options available to holders of federal student loans.
If you decide that consolidating your student loan debt into your mortgage is a good option for you, compare the best lenders and their rates and terms on SuperMoney’s Mortgage Refinance Reviews page. You can also find out more about consolidating your student loan debt by visiting SuperMoney’s Best Student Loans Reviews & Comparison page.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.