If you have a home and are burdened with student loans, a cash out refinance can help you consolidate your debt into your mortgage. When you do that, you combine your student loans and your home into a new mortgage and save money with a reduced interest rate.
However, you may lose certain student loan protections and come with certain drawbacks. This guide will go through everything you need to know to help you make an informed decision.
With that said, let’s begin.
What Is A Student Loan Cash Out Refinance?
With a student loan cash out refinance, you take out a new home loan for a higher amount than you now owe. Then, use the extra money to pay down one or more of your student loans.
It’s a method of obtaining funds without selling your home.
Let’s imagine your home is worth $230,000, and you owe $160,000 on your mortgage. You may take out 80% of your home’s equity by refinancing with traditional cash out refinance. You’d pay down the $160,000 outstanding on your present student debt and have $24,000 in cash.
Any money borrowed that exceeds the refinanced loan balance is subject to higher interest rates and additional fees. But that has changed due to Fannie Mae’s loan refinancing limitations.
Fannie Mae’s Cash Out Refinance Program
You can find numerous loan lenders offering student loan cash-out refinance. However, Fannie Mae’s program makes the process easier for you to apply for a mortgage-backed by Fannie Mae.
However, this program, including other types of cash-out refinances, necessitates using your property as collateral and may have certain drawbacks, such as potentially increasing total student loan interest costs and removing your student loan interest deduction.
According to Fannie Mae’s guidelines, at least one student loan must be completely paid off with the cash-out refinance profits. That means this form of refinancing will no longer be regarded as a cash-out refinance, as it was previously.
Furthermore, because the refinance is no longer a cash-out loan, the additional fees and higher interest rates don’t apply.
In terms of the guidelines, it’s also simpler to be eligible for non–cash-out refinance loans than traditional cash-out refinance loans.
Types Of Cash-Out Refinance
Fannie Mae’s Student Loan Solutions is the only recognized program specifically created to help borrowers use cash-out refinance to pay off their debts. But you have other options as well.
If you have equity in your house, many lenders will let you take cash out for any reason, including paying off school loans.
How You Can Prepare For A Student Loan Cash Out Refinance
1. Understand The Lender’s Minimum Requirements.
For cash-out refinancing, different student loan lenders have other requirements. But most of them have a minimum credit score; the higher the credit score, the better.
Standard requirements are a 20% equity at least in your property and a debt-to-income ratio of less than a specified percentage. Remember to check for the requirements when searching for alternatives.
2. Make Sure Your Information Are Ready When Applying
Prepare all of your financial details linked to your assets, income, and debt for the application after you’ve shopped around for lenders with the best terms and interest rates.
Keep in mind that when the lender examines your application, you may be required to submit further documentation.
3. Find Out The Exact Amount You Need
Find out the exact amount you need in the cash out refinance and borrow the exact money.
So if you want to use the money to consolidate your student loans, gather your credit card statements and personal loan, including information on any financial obligations and total what you owe.
That will help you find the exact amount you need.
What You Should Know Before Cash Out Refinancing
You won’t be able to access all of your equity. To qualify for a cash-out refinance, most lenders ask that you have at least 20% equity in your house. A VA cash-out refinance is excluded. The VA refinance permits you to take out all of your equity.
You may wind up with a completely different loan. The terms of your new loan may differ from those of your existing mortgage because you’re replacing it with a new one. You might have a lower or higher interest rate. Or a shorter or longer student loan period, for example.
You’ll need to get your house evaluated. For traditional cash-out refinances, loan lenders often require an appraisal because the amount you may borrow is determined by how much equity you have.
You’ll take care of the closing charges. Cash-out refinances, like initial mortgages, come with closing fees, which cover appraisal costs, lender fees, and other expenses. It’s vital to think about the costs of a cash-out refinance because the prices may not be necessary, especially if you’re not borrowing a substantial amount.
The money won’t show up in your bank account immediately. Lenders are required to give you three days after the refinance closes to cancel it. As a result, you will have to wait a few days before receiving the payments.
A Detailed Look At How Student Loan Cash Out Refinance Work
The process is quite identical to getting a house loan. You pick a student loan lender, submit an application, including documentation to underwriting, receive approval, and wait for your check once you know you meet the requirements.
Here’s how the process works in more detail.
1. Check The Lender’s Requirements
The lender determines who qualifies for a refinance. The following are some of the standard requirements for cash-out refinancing:
You Need At Least A 620 Credit Score. You usually need a credit score of at least 580 to refinance. However, if you want to withdraw cash, you’ll need a credit score of 620 or better.
A DTI of less than 50%. Most lenders need your existing debt-to-income ratio to be less than 50% to refinance your student loan.
You need a significant amount of your home’s equity. If you want to refinance, you’ll need a good amount of equity in your house. Remember that unless you’re eligible for a VA refinance, your lender won’t let you cash out your entire equity.
So take time to consider your current equity before you make any decision. Also, make sure you have adequate equity to achieve your objectives.
2. Determine The Amount Of Cash You Need
Determine how much money you require if you meet the requirements. If you intend to use your cash for improvements or repairs, acquire a few estimates from local contractors, so you know how much you’ll need.
If you’re looking to refinance to consolidate debt, gather all your credit card and bank statements and figure out how much money you’ll need to pay off your bills.
3. Apply For Cash Out Refinance Via Your Lender
After you submit your application, your lender will decide whether or not to approve the refinance. To prove your DTI ratio, your lender may request financial documentation like W-2s, bank statements, or pay stubs.
Your lender will assist you through the following steps as you close once you’ve received approval. What you do after is wait for the check to come. It usually takes three to five days to arrive.
Benefits Of Cash Out Refinance
1. You Don’t Have To Deal With Your Loan Servicer Anymore
If your student loan servicer isn’t helping you, the cash out refinance can help you stop managing your loans.
You won’t have to deal with your loan servicer anymore because your mortgage lender will repay your student debts. Instead, you’ll repay your mortgage lender for the refinanced loan.
2. Use Funds For Home Renovations And Improvements
Upgrades are frequently required for bad architectural choices, faulty HVAC systems, and many more. A cash-out refinance you to pay home upgrades with the equity you’ve previously built up.
3. Student Loan Consolidation Is Possible
When you opt for the student loan cash-out refinance program, you combine your loan debt with your home debt or mortgage. As a result, you’ll make a single payment to your lender rather than making separate student loan and mortgage loan payments.
This process makes repayment much easier when you consolidate them. On the other hand, direct loan consolidation can combine federal student loans, whereas refinancing combines federal and private student loans.
4. You Can Benefit From The Tax Deductions
If you plan to utilize the cash for home improvements and the project fulfills IRS qualifying rules, you may be able to deduct interest on your taxes.
5. You Can Save Money On Interest
The purpose of cash-out refinancing is to save money on interest. For example, if your student loans have high-interest rates, you can save money by refinancing them with your mortgage.
It’s crucial to keep in mind, though, that deferring payments for a long time may result in higher interest costs. Plus, instead of rolling your student loans into your mortgage, you might be able to achieve a similarly low rate by refinancing them independently.
6. Get Money For Investment
Considering the compounding interest can be an ideal decision to free up money and start saving for retirement sooner rather than later. Cash-out refinancing provides you with funds to start a student fund or increase your retirement savings.
Disadvantages of Student Loan Cash-Out Refinance
1. Your Interest Rates Can Increase
Refinancing is a good idea to improve your financial standing and acquire a better rate. However, it’s usually not a good idea to refinance with cash if it raises your interest rate.
2. You Change Your Unsecured Loans Into A Secured Student Loan
A student loan is unsecured because it’s not secured by anything. So your lender can’t seize your property even if you default on your student loans. But that’s not the case with a mortgage.
If you can’t make your mortgage payments, you could face foreclosure. So if you’re not sure that cash-out refinance is the right option for you, be sure before you proceed. If not, it’s better to look for other alternatives.
3. You Forfeit Any Student Loan Protections And Plans
You give up access to student loan protections when using your home equity to pay off your student loans.
There are various repayment options available for federal student loans, including income-driven repayment. These programs qualify for deferment and forbearance.
Furthermore, federal student debts can qualify for loan forgiveness programs. However, you won’t be eligible for these plans if you incorporate your student debts into your mortgage.
4. You Can Make Payments For Years, Even Decades.
If you consolidate your debt with a cash-out refinance, make sure you repay them as fast as you can. Remember that any cash you take out is repaid over 30 years, so using a cash-out refinance to pay off higher-cost debt may not be an ideal solution. Instead, it’s a better use of the money or cryptocurrency towards house renovations.
5. You’ll Lose Some Of the Equity You Built.
When you refinance your debts, the amount you owe on your house will grow. As a result, you’ll lose some of the equity you’ve built up, and the bank will now own the same portion of your property as you.
6. You Might Use Your House As A Piggy Bank
Using the equity in your house to pay for things demonstrates a lack of financial discipline. Seek help if you’re having trouble controlling your debt or spending habits.
When Is Cash-Out Refinance Good For You?
If you’re having trouble making your student loan and mortgage payments each month, a refinance may help if it lowers your overall monthly payment in the short term.
To enhance your debt-to-income ratio, you might want to consider a student loan cash-out refinance. Your new, reduced monthly dues may, after all, be more in line with your salary.
If you want to use the extra cash on something else, a student loan cash-out refinance can be a good idea. You’ll have a monthly payment schedule that would allow you to pay off both your school and your mortgage debt eventually.
Most homeowners use the cash from refinancing for the following projects or reasons:
Home Improvement Projects
Some homeowners use the funds from cash-out refinancing to renovate their homes. Then, they subtract the mortgage interest rate from their taxes if the upgrades significantly boost the home’s value.
Loan Consolidation With High-Interest
When compared to other types of debt, refinance rates are typically cheaper. The funds from a cash-out refinancing can be used to pay off these loans and replace them with a single, affordable monthly payment.
Pay For Your Child’s Education
Using home equity to pay for college expenses makes sense if the refinance rate is significantly lower than the rate on a student loan.
You can use the funds to help buy an investment property or save for retirement.
Home Equity Loan & Cash-Out Refinance: Which One Is Ideal?
Home equity loans, cash-out refinancing, and home equity lines of credit (HELOC) are all ways to leverage the value of your property. But they are all different. Home equity loans and lines of credit are new mortgages, whereas a cash-out refinance your current mortgage with a higher debt amount.
When deciding between a home equity loan and a refinance, one method to determine which is best for you is to compare interest rates. Cash-out refinancing typically offers better interest rates if you qualify, but it may come with higher closing expenses.
You’ll also want to consider any potential tax benefits that a refinance can provide. Another point is to look at the pros and cons of each before you begin.
Cash-out refinancing can help you pay off your student loans or renovate your house. And it can provide you with the funds you need to achieve your goals. Consult a financial expert if you’re unsure if a refinance is good for you.
Before selecting whether or not to change your student loans into a mortgage, think about the costs, dangers, and your current financial position.
If you’re in a good spot right now with steady employment and enough equity, cash-out refinancing could help you eliminate your student loan debt.
Final Thoughts
Although there are certain advantages to a student loan cash out refinance, the disadvantages may exceed the benefits. Instead, consider refinancing your loans independently. You can negotiate a reduced rate and new loan terms when you refinance. Another option is to consolidate your student loans. However, you forfeit any federal protections and forgiveness programs when you refinance your federal student loans. If you’re having trouble repaying your student loans, consider loan forgiveness programs and repayment programs. If you don’t know where to begin, speak to a student loan expert to help you make the right decision.
