Pay Off Student Loans with a Mortgage

Student loan debt continues to climb, so you’re not alone if you’re struggling to pay back your loans. However, you should think carefully before you pay them back by taking out a home mortgage. Once you take a mortgage, the bank can foreclose on you if you’re late with payments, which means you can end up homeless. Consider alternatives such as loan consolidation or income-based repayment.

Steps

Checking How Much You’ll Save

1. Identify the types of mortgage loans available. You can typically get either a home equity loan or a home equity line of credit. Consider the differences:
   • Home equity loan. You borrow against the equity in your home. You’ll repay the loan in installments, just as you did your original mortgage. Generally, your home equity loan will have a fixed interest rate.
   • Home equity line of credit (HELOC). Tap the equity in your home like you would a credit card. You don’t pay back in installments. Instead, the amount varies, much like a credit card payment. A HELOC might start off with a lower interest rate, but the rate usually fluctuates and can go higher over time.
2. Shop around for the best mortgage rates. You’ll only really save if the interest rate on the mortgage is lower than the rate on your student loans. Accordingly, research the current interest rates available from lenders. Stop at local banks and tell them you are interested in getting a second mortgage.
   • Check interest rates online. Website aggregators, such as LendingTree and Bankrate.com, let you compare many lenders at once.
   • Also consider fees and closing costs, which will increase the cost of the loan. If you can’t find this information online, ask the lender.
   • Interest rates are different for home equity loans and HELOCs, so decide which one you want to pursue. If you’re undecided, then collect rate information for both types of loans.
3. Look into SoFi’s student loan payoff refinance. Generally, interest rates on a second mortgage will be higher than they were on your original mortgage. Accordingly, getting a home equity loan or HELOC on your own might not be beneficial. However, the non-bank lender SoFi will roll your student loans into your mortgage at current, low interest rates.
4. Crunch your student loan numbers. Before applying, you need to calculate how much you’ll save, if anything. Use an online calculator to estimate how much you will pay over the life of your student loans. Enter the total amount you owe, the interest rate, and the number of payments you have left.
   • For example, you might owe $50,000 in student loans at 6.8% interest. Over 10 years, you’ll pay about $69,000 in total, of which $19,000 is interest.
5. Estimate the costs of taking out a mortgage. Interest rates are only one part of the overall cost of your student loans. You also need to consider the repayment period. Generally, student loans are paid back over 10 years. However, your mortgage might last for up to 30 years. Use a debt repayment calculator to estimate the total cost of repaying the student loans using the terms of a home mortgage.
   • For example, you might have $50,000 in loans. Your mortgage will have a 4% interest rate over 30 years. In total, you will pay about $85,000, of which $35,000 is interest. This is much more expensive than simply paying your student loans.
   • If you took a 15-year mortgage at 4%, then you will pay about $66,600 in total, of which $16,000 is interest. You can save about $3,000 by using a mortgage to repay your student loans.
6. Understand the risks of taking out a mortgage. By taking out a mortgage on your home, you can lose the house if you run into financial trouble down the road. This happens because your home acts as collateral for the loan. When you default, the lender can seize the collateral—your house.
   • By contrast, a student loan lender can garnish your wages, but they can’t seize your home. You only put your home at risk by taking out a mortgage.
   • Think twice before taking out a mortgage to pay off your children’s student loans. They probably have a lower income, so the lender can’t even garnish that much to pay off the loans.

Applying for the Mortgage

1. Estimate your home’s value. You can’t borrow more than your home is worth, so you need some idea of its current value. Estimate the value in the following ways:
   • Look at your tax bill, which should contain the assessed value. Contact your county assessor if you’ve lost your bill.
   • Research how much comparable homes have sold for in your area. Visit the Zillow or Trulia websites. Make sure the homes are similar in size, with the same number of bedrooms and bathrooms.
   • Have your home appraised. You’ll probably have to pay a few hundred dollars to get a professional appraisal. Obtain referrals to an appraiser from a real estate agent or your lawyer.
2. Calculate how much you can borrow. Let’s say your home is worth $200,000, but you still owe $100,000 on the mortgage. In this situation, you only have $100,000 in equity. Generally, lenders let you borrow up to 85% of your home’s equity. In this situation, you can borrow up to $85,000 to repay student loans.
3. Check that you satisfy loan requirements. In addition to having equity in your home, you’ll need to satisfy other requirements—just as you did when you applied for your initial mortgage. Review the following:
   • Credit score. Generally, you need good credit to get a second mortgage. However, if you have substantial equity, you might still qualify if you have a lower score.
   • Income. You need to prove that you can repay the loan.
   • Debt-to-income ratio. Add up all debt, including credit card debt, and compare it to your income. For example, you might make $4,000 a month but have $1,000 a month in debt payments. In this situation, your ratio is 25%. Generally, your ratio must be 45% or lower to qualify for a loan.
4. Apply. If you’re comfortable with the risks, then contact a loan officer and ask for an application. Remember to provide all information requested and double check it for accuracy. If you have a question about the application, contact the loan officer for help.
5. Pay off your student loans. Once you get the mortgage, you need to use the proceeds to pay off your student loans. If you go with SoFi, they pay your student loan lenders directly. You won’t receive a check, and can instead sit back and relax.
   • However, if you get your own mortgage, you’ll receive a check from your lender. You need to deposit it into your bank account and then pay off your student loans.

Reducing Your Student Loan Payments

1. Check what you can afford each month. Create a budget, listing your fixed and discretionary expenses. Fixed expenses are things like your rent, car payment, and health insurance premiums. See how much money you have left over each month for paying student loan debt.
   • The standard repayment plan for student loans is 10 years. You’ll pay an equal amount each month for 120 months.
   • There are many ways to lower the amount you pay each month, either temporarily or permanently. Reduce your discretionary spending as much as possible, which will give you more repayment options.
2. Consolidate your student loans. This is usually a better option than refinancing a mortgage to pay off your student loans. You can roll all of your student loans into one loan with a lower interest rate. Consolidating makes repayment easier, and it can lower your monthly payment.
   • You can consolidate federal loans using a Direct Consolidation Loan, which you apply for through the StudentLoans.gov website. However, this new loan’s APR will be the weighted average of APRs for all of your current loans, so you won’t save money.
   • To save money, consolidate with a private loan. You can use a private loan to consolidate either federal or private student loans. Generally, you need a credit score in the mid-600s. Interest rates range from two to nine percent.
3. Pursue income-based repayments. Federal loans will let you pay a lower amount each month if your income is low. Contact your lender and ask about any of the following:
   • REPAYE Plan. Pay 10% of your discretionary income. Any borrower is eligible.
   • PAYE plan. Pay 10% of your discretionary income and never more than the 10-year Standard Repayment Plan amount. This plan has income eligibility requirements.
   • IBR Plan. Pay 10% or 15% of your discretionary income, depending on when you borrowed the loans. This plan has income-eligibility requirements.
   • ICR Plan. Pay either 20% of your discretionary income or what you would pay over the course of a 12-year fixed repayment plan. If you have PLUS loans, this is your only option.
4. Stretch out your repayment period. You can lower your monthly payment by extending the repayment period for up to 25 years. You’ll end up paying more in interest over the life of the loan, but you won’t put your home at risk like you will by paying the loans off with a mortgage.
   • Use the Repayment Estimator to check how much you’ll end up paying.
5. Apply for graduated payments. Federal loans qualify for this option. The details will differ depending on your circumstances, but you typically pay a lower amount the first couple of years. The amount increases in subsequent years. Graduated payment is a good option if you anticipate your income rising in the future.
   • You can combine a graduated repayment plan with an extended repayment plan.
6. Seek forbearance or deferment. You can temporarily lower your monthly payments or stop making them altogether by seeking a forbearance or deferment. With forbearance, interest continues to accrue on your loans. However, it generally doesn’t accrue with deferment.
7. Contact your private lender. Your private loans have fewer repayment options than federal loans. To find out exactly what is offered, call up the lender and ask. Don’t delay.
   • Generally, your best option is to consolidate with a lower interest rate.
   • However, some lenders might offer short-term forbearance.

Sources and Citations

See also

• Assume a Car Loan
• Apply For a Fannie Mae Loan
• Calculate How Much House You Can Afford
• Get Payday Loans With Bad Credit
• Get a Home Improvement Loan
• Write a Personal Statement for a Scholarship
• Pay Your Mortgage With a Credit Card
• Get a College Scholarship
• Get a Collateral Loan
• Refinance Student Loans

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