What To Know If You Refinance Your Mortgage To Pay Off Student Loans

August 27, 2020

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With mortgage interest rates at historic lows, you may even be wondering if you should tap your home’s equity to pay off higher-interest debt, including your student loans. This might be a good option if you qualify for a student loan cash-out refinance, which uses home equity to pay off student loans.  A student loan cash-out refinance involves applying for a bigger mortgage to cover your mortgage balance alongside one of your student loans. To qualify for a Fannie Mae-backed student loan cash-out refinance, you need to hold at least 20% equity in your home to qualify—and you must pay off at least one student loan in full in the process. The biggest risk of a student loan cash-out refinance is adding to your mortgage balance. While you may lock in a lower interest rate, you may also increase your monthly mortgage payment. You should also consider refinance closing costs, and how long it will take you to break even on the transaction. Also, understand you'll be losing many protections, such as payment forbearance and even the current pause of student loan payments and interest. You’ll also lose the interest payment credit on your taxes. If you don’t have a large student loan balance, spending thousands on closing costs may not be worth it. If you’re among the most creditworthy borrowers (high credit score, low debt-to-income ratio and steady employment) you may explore less risky options—like refinancing your student loans themselves. One benefit of this option: you won’t lose your tax deduction for student loan interest.

SOURCE Two Cents

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