Cash Out Refi to Consolidate Student Loans

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Every college graduate wants student loan payments to disappear.  However, unless you know David Copperfield, they aren’t vanishing anytime soon. A cash out refinance is the next best option to make student loans disappear.

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Learn more: deferred student loans and home loan approval

Cash Out Refinance to Pay Off Student Loans

Graduates with enough equity in their home can use that equity to pay off their student loans. This type of home loan is known as a “cash out refinance.”  However, this is no ordinary cash out refinance.  Students are given special treatment on a cash out refinance that saves them money! 

Consolidating student loans into your home loan significantly reduces monthly payments (in most cases).  Student loans typically have short payback periods such as 10-15 years.  In contrast, home loans commonly have longer payback periods such as 30 years.

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Due to this fact, a student loan due in 10 years translates to a much lower payment when spread over a 30 year home loan.  For example, check out these 2 scenarios:

Scenario 1: Pay Student Loans and Home Loan

  • Student Loan total balance: $60,000
  • Student Loan total monthly payments: $666*
  • Mortgage balance: $250,000
  • Mortgage payment: $1,250**
    Total Monthly Payments: $1,916
    * 10 year term at 6%
    **30 year fixed at 4.25% and 4.27% APR

Scenario 2: Consolidate Student Loans into Home Loan

  • Mortgage balance: $310,000
  • Mortgage payment: $1,525***
    Total Monthly Payments: $1525
    *30 year fixed at 4.25% and 4.29% APR

The student in this example saved $691/month by consolidating $60,000 in student loans.  Consolidating your student loans into your home loan provides several benefits.  For example:

  • Monthly savings
  • Possible tax savings (check out what the IRS says about this)
  • Reduce the number of separate payments you need to manage
  • Leverage savings into other investment opportunities

Students Get Lower Rate on Cash Out Refinance

Typically, cash out refinances have higher interest rates compared to non-cash out refinances.  In fact, the rate increase on a cash out refinance varies from .125% to 1% higher than a non-cash out.   However, cashing out to pay off student loans does not raise your interest rate.  That is the special treatment mentioned above!  No hit for cash out when you consolidate student loan debt.

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Fannie Mae created a special exception to the standard cash out rate increase for student loan debt consolidation.  As a result, students receive a discounted interest rate when consolidating student loans!

By Jeremy House

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