Should You Refinance Your Mortgage to Pay Off Student Loans? - Credible News

If your home equity has grown and you qualify for a lower interest rate, doing a student loan cash-out refinance may help you save money.
Kim Porter

Kim Porter is an expert in credit, mortgages, student loans, and debt management. She has been featured in U.S. News & World Report, Reviewed.com, Bankrate, Credit Karma, and more.

Read more” > Kim Porter Edited by <a href="https://www.credible.com/blog/author/cjennings/" class="entry-meta__tooltip" data-tooltipjs="" data-tooltipjs-hover="true" data-tooltipjs-placement="top" data-tooltipjs-close-on-outside-click="true" data-tooltipjs-title="Credible’s editing process includes rigorous fact-checking by experts to ensure that all content is accurate and up-to-date. This article has been reviewed, edited, and fact-checked by Chris Jennings. As a Credible authority on mortgages, Chris covers topics including home loans and mortgage refinancing. His work has appeared in Fox Business and GOBankingRates.Read more” > Chris Jennings Updated August 11, 2021
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If you’ve got a large student loan, it could make sense to pay it off using the money from a cash-out refinance. This is usually known as a “student loan cash-out refinance.”
Rising home equity values may help you qualify for a cash-out refinance and borrow more money. In the first quarter of 2021, homes with a mortgage gained $33,400 in equity, the largest average equity gain in at least a decade, according to real estate data firm CoreLogic.
But before refinancing your mortgage to pay off your student loans, it’s important to know what’s involved, the drawbacks you might encounter, and your alternatives to consider:

A student loan cash-out refinance is a mortgage that allows you to use your home equity to pay down a student loan balance. This means you combine your mortgage and student loans into a new loan.
You can potentially reduce the interest rate you were paying on your educational debt as well, saving you more money in the process.
To qualify, you’ll typically need to use the cash to fully pay off a student loan in your name. The lender will send the cash straight to the student loan servicer at closing.
You could do a student loan cash-out refinance totaling $150,000, and your mortgage lender would use the $50,000 to pay off your student loan.
Find Out: How to Refinance Your Mortgage in 6 Easy Steps

If you want to use your home equity to pay off your student loans, you have two options:
Best for: Homeowners who don’t qualify for Fannie Mae’s program or want to use their extra cash for multiple expenses
When you do a general cash-out refinance, you take out a new mortgage for more than you owe, pocket the cash, and pay down the new mortgage over time. You can use the money for any purpose, including paying off student loans.
To qualify, you’ll typically need to have:
Credible makes refinancing easy. You can see prequalified refinance rates from our partner lenders in just a few minutes. We also provide transparency into lender fees that other comparison sites typically don’t.
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Best for: Borrowers who can pay off their entire student loan with the cash-out proceeds
Fannie Mae’s Student Loan Solutions program is designed to help student loan borrowers better manage their monthly payments and qualify for a mortgage loan. One feature of the program allows homeowners to pay off their student loans using their home equity at lower rates.
Eligibility depends on several factors:

A student loan cash-out refinance pays off your student loans and may help you save money in some cases, but keep in mind, you’ll be responsible for a new mortgage.

Before applying for a student loan cash-out refinance, ask yourself these questions:

Using your home as collateral can be risky — so if you’re looking to play it safer, there are other options for paying down your student debt.
Best for: Borrowers with private student loans
When you refinance a student loan, a private lender pays off your balance and issues you a new loan based on your creditworthiness. This can help you save money and lower your payments if you qualify for a student loan with a lower interest rate.
With the savings, you can make larger student loan payments and pay down the balance quicker.
Remember, while you can refinance a federal student loan with a private lender, it’s not always a good idea as you’ll lose certain borrower protections. Use a student loan refinancing calculator to see if a refi makes sense.
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Best for: Homeowners who can shave 0.75% off their mortgage rate
A rate-and-term mortgage refinance involves taking out a new mortgage with a new interest rate, new loan term, or both. You won’t borrow cash in the deal, if you lower your mortgage payment, you can use the savings toward your student loan debt.
Mortgage experts say refinancing is a smart move if you can lower your interest rate by at least 0.75%.
Best for: Borrowers who don’t qualify for a refinance, don’t want to pay closing fees on a refinance, or want to use a simple strategy
Most borrowers are only required to make one student loan payment a month, but you could pay every two weeks instead. With biweekly student loan payments, you’ll cut your bill in half and pay that amount every two weeks.
With this strategy, you’ll effectively make 26 half-payments, or 13 full payments, during the year. This can expedite your repayment and potentially help you save money, since interest will accrue on a smaller balance.
Kim Porter is an expert in credit, mortgages, student loans, and debt management. She has been featured in U.S. News & World Report, Reviewed.com, Bankrate, Credit Karma, and more.
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