Rolling Student Loans Into A Mortgage: The Pros, Cons And Alternatives

American college students today graduate with an average debt load of $38,290. Balancing student debt on top of a mortgage and other monthly obligations can be a challenge. Many graduates consider rolling their student loans into their mortgages to help manage their debt.

While consolidating student loan payments into your mortgage is possible, it’s not always your best option. Like any financial decision, there are pros and cons. Let’s explore some of the factors to determine if rolling student loans into a mortgage is a good idea.

Can You Roll Student Loans Into A Mortgage?

Rolling student loans into a mortgage is possible with the right loan and enough equity in the home. Equity is the difference between your home’s value and your current outstanding mortgage balance. It’s the money you could walk away with if you sold your house today.

Rather than selling your house, you can keep your home and roll your student loan debt into your monthly payment. This can make it easier to manage your finances and maybe even save money on interest charges. To qualify, you’ll need a decent credit score and proof you can afford the higher loan payment that rolling debt into your mortgage creates.

How Does Rolling Student Loans Into Your Mortgage Work?

Rolling student loan debt into a mortgage increases your mortgage payment but eliminates (or lowers) your other debt payments. Whether you have one or two monthly payments depends on whether you move the entire amount into your mortgage or just some of it.

Homeowners have a few options to roll student loans into a mortgage, including a cash-out refinance to consolidate student and mortgage debt or Fannie Mae’s Student Loan Cash-Out Refinance program.

Technically you’re “reshuffling” the debt versus paying it off all at once. The key to consolidating student loans with your mortgage is to take advantage of low mortgage refinance rates (if possible) and simplify your monthly finances.

What To Consider Before Consolidating Student Loans Into A Mortgage

Before you roll your student loans into a mortgage, it’s essential to understand the pros and cons of increasing your mortgage loan balance.

Benefits

Some of the advantages of rolling your student loans into a mortgage include:

• Lower number of monthly payments: When you have one too many things on your plate, it’s easier to miss a monthly payment or make budgeting errors. When you consolidate student loans into a mortgage, you have just one payment to manage. This reduces your risk of a late or missed payment.
• Reduced interest rate: If you have decent credit and few other debts, you may qualify for a lower interest rate than you pay on your current student loans. Lowering the interest rate on loans could save you thousands of dollars over the life of the loan.
• Tax benefits: You may be able to write off some or all of the interest paid on your mortgage. Student loan interest isn’t always tax-deductible, but when you wrap it into the loan, you may be able to deduct it. Talk to your tax advisor about your options.
• Reduced monthly payment amount: Not only will lowering the interest rate save you money over the life of the loan, but it may also lower your overall monthly payments. Lower payments help with your budget and might even help you make extra payments so you can pay down your mortgage early.

Drawbacks

There are also several disadvantages to consolidating your student loan debt. As a result of rolling your student loans into a mortgage, you may:

• Risk losing your home: Rolling your student debt into your mortgage can turn your once unsecured debt into a secured loan. If you default on the loan you could risk your home since your house is the collateral for your mortgage.
• Lose federal protections on your student loans: Certain kinds of federal student loans may have repayment options or protections that lower payments or forgive a portion of your loan balance. When you roll your federal student loans into a mortgage, you give up any protections by converting the debt to a different type of loan.
• Pay more interest over the life of the loan: Even with a lower interest rate, your student loans may cost more money if you stretch the debt out over a longer amount of time.
• Find it more difficult to qualify: A cash-out refinance requires a decent minimum credit score and a low debt-to-income ratio. Since lenders take a risk lending additional money, they have stricter requirements to ensure you qualify for the loan.

What To Know About Rolling Student Loans Into A Mortgage

If you’ve decided you’re ready to roll your student loans into a mortgage, here are some tips to make the process easier.

1. Find A Low-Interest Rate

In a low interest rate environment, it’s an easy decision to refinance your debts into your mortgage. If current mortgage rates are higher you may have to do some careful comparison. If you have higher student loan rates, you can refinance the debt into your mortgage and save money on interest.

2. Consider Your Repayment Period

If you stretch your loan length, such as a 30-year term, make sure the total interest isn’t more than your student loans would have cost. To get the best interest rates and mortgage loan conditions, you’ll need good credit, low debt ratios and proof that you can handle the higher loan amount.

3. Don’t Forget Closing Costs

Then there are the closing costs to consider. Ensure they aren’t so high that they defeat the purpose of refinancing. If these fees drive up the cost of your student loans, rolling them into your mortgage might not be advantageous for you. Typical closing costs on a mortgage refinance are 2% - 6% of the loan amount.

4. Pick A Loan Program

If rolling student loans into your mortgage does make sense, you can use a conventional or FHA cash-out refinance or the Fannie Mae Student Loan Cash-Out Refi loan.

In a traditional cash-out refinance (conventional or FHA cash-out refinance), you borrow enough money to pay off your student loan, receive the proceeds and pay the student loans off yourself. You have a new, higher mortgage loan and only one payment each month.

With the Fannie Mae Student Loan Cash-Out Refi, the premise is the same, but to qualify, you must pay off at least one student loan in full, and the lender must pay the student loan servicer directly rather than giving you the proceeds. The only cash you may receive in hand is the lesser of 2% of the loan amount or $2,000.

How To Roll Student Loans Into A Mortgage

The process of rolling student loans into a mortgage is simple. You’ll need to take the following steps.

1. Choose a loan. For this type of debt consolidation, a conventional or FHA cash-out refinance, or the Fannie Mae Student Loan Cash-Out Refi are the most likely options. Talk to your lender if you aren’t sure what option is right for you.
2. Apply for the loan. When you talk to your lender you’ll need to fill out an application and make disclosures to your lender. They’ll need to verify your income, assets, credit score, current home value and current balance of your mortgage and student loans.
3. Provide documentation. Provide qualifying documents to prove you can afford the higher loan amount. Depending on the situation, this could include additional documentation from bank statements as proof of your assets. Make sure to provide anything your lender requests promptly.
4. Close on the loan. Once your lender verifies your information and the loan is approved, you’ll close on the loan. You’ll need to sign documents and pay any cost due at closing.
5. Pay off your original student loan. If it’s a cash-out refinance, you’ll receive the loan proceeds and directly pay your student loan servicers. Or, if it’s a Fannie Mae Student Loan refinance, your lender will pay the student loans off for you.

Alternatives To Consolidation

If consolidating your student loans into your mortgage doesn’t make sense, or you don’t want to refinance your first mortgage, there are a few alternatives.

Apply For Loan Forgiveness Programs

Federal student loans may be eligible for federal loan forgiveness programs, especially if you work for a non-profit organization or in a high-need area. To qualify, you’ll need to refinance your loan into an income-based repayment plan. This type of plan lowers your monthly payments to a specific percentage of your income.

Once you make a certain number of on-time payments – usually 10 to 20 years’ worth – your loan is forgiven. That means you won’t have to pay the remaining loan balance.

Separate Student Loan Refinancing

If your mortgage has a great interest rate or you don’t want to increase the balance, you can refinance your student loans with a federal student loan refinance program or even with a private lender.

If you use a private lender, make sure you won’t retain any federal benefits. Once you refinance your federal loans, you lose all protections. Talk to a financial advisor before refinancing your loans to make sure you’re making the right choice.

Use A Home Equity Loan

You can also tap into your home’s equity by taking out a home equity loan. A home equity loan is a second mortgage that gives you access to your home’s equity without touching your first mortgage.

Apply For Repayment Assistance Through Your Employer

The Bottom Line

If you have student loan debt, rolling student loans into your mortgage may seem ideal – especially if you can get a lower rate. Keep in mind, it may not be your best or only option. Before you wrap your student loans into your mortgage, consider your choices carefully and consider all your options.