A new program from Fannie Mae made it a lot easier to save on interest by refinancing student loans. The new program, the Student Loan Cash-Out Refinance, streamlines the process and makes it easier to qualify for a mortgage to pay off an existing student loan.
Under the old rules, there were usually extra fees borrowers had to pay for any “cash out” mortgage – that is, a refinancing where the new mortgage is larger than the old mortgage and the borrower has extra cash left over from the loan.
Cash-Out Mortgage Example
For example, let’s say you have a home worth $500,000, and a mortgage balance of $200,000. You can refinance up to 80 percent of your home’s value, so you can actually borrow up to $400,000, paying off the existing $200,000 mortgage if you can do so at a better interest rate, and have an extra $200,000. Since you have extra cash, that’s a “cash-out mortgage.”
But lenders typically charged extra fees, and any amounts you took in cash was considered a higher-risk loan, and therefore subject to a higher interest rate.
But the new Student Loan Cash-Out Refinance allows you to receive the same advantageous interest rates on any cash out from a refinance – and reduce some of the other fees – as long as you use the proceeds to completely pay off an existing student loan.
You can use the program to pay off one of your own existing student loans, or use it to pay off one or more loans on behalf of your children.
Fannie Mae’s rules require that the cash out be paid directly to the student loan servicer. You can’t take possession of the money earmarked to pay off the loan, personally.
Also, you have to use the loan proceeds to completely pay off at least one student loan. You can’t use the program to make a partial payment.
Essentially, Fannie Mae no longer categorizes these loans as a “cash-out refinance.”
Lastly, Fannie Mae’s rules require you to retain at least 20 percent in your home after the loan. So you’ll need to have some equity in your home to start with.
Advantages
- Interest rates on home mortgages are typically much lower than those for student loans.
- You may be able to qualify for a lower payment, improving your cash flow and debt-to-income ratios.
- You may be able to pay off the loan faster, paying less overall interest over the life of the loan.
- Mortgage interest is deductible. So is student loan interest, but only for people with incomes of $80,000 or less ($165,000 for married couples). Higher income households, therefore, may see more of a benefit from refinancing via a Student Loan Cash Out Refinance mortgage than lower-income households.
Disadvantages
- You are replacing an unsecured debt with a secured debt. That is, they can’t repossess your diploma if you default on a student loan. But a lender could potentially foreclose on your home.
- Student loans can be placed into forbearance during periods of unemployment or illness. Most home mortgages cannot be.
- Student loans may qualify for income-based repayment programs.
- Student loans usually have a 10-year repayment term, while most mortgages have a 15-30 year term. To maximize the total savings on interest, you would have to pay down your mortgage ahead of schedule, or opt for a shorter term.
For these reasons, the Student Loan Cash Out mortgage works best for those with relatively certain employment prospects or the resources to
Does it make sense for you? Give us a call at Pacific Home Loans at (808) 891-0415,
and let us help you run the numbers and see for yourself.