Should I Refinance My Student Loans with My Home Equity?

06, January, 2023

If you chose to broaden your horizons by pursuing higher education, fulfilling your goals likely required taking on some debt. While taking on student loan debt may have been a necessity, repaying these financial obligations can seem virtually impossible.

Even if you only have federal student loans with income-driven repayment plans, juggling your monthly student loan payments can still be quite challenging. These payments become especially difficult if you have private student loans with extremely high balances.

Fortunately, the federal student loan freeze has been pushed back until June 2023, which may give you some time to explore ways to repay your student loans and save money. You should use this grace period to address any private student loans as well, since the freeze and student loan forgiveness programs do not apply to these obligations.

The question is this: How can you reduce your monthly expenses and pay off some — or all — of your existing student loan debt? If you are a homeowner, there are solutions like a home equity line of credit (HELOC), a home equity loan, or a cash-out refinance.

Not sure if tapping into your home’s equity is the right move for your financial situation? If you are on the fence about putting your home equity to use, take a closer look at the benefits of cash-out student loan refinancing so that you can make an informed decision.

What’s a Home Equity Loan?

Before turning your attention to cash-out student loan refinancing and the unique lending product known as the Fannie Mae student loan cash-out refinance program, you should quickly review the basics of a home equity loan.

A home equity loan is a financial product that allows you to tap into your home’s equity. Equity is the amount your home is worth, minus what you owe. For instance, suppose that your home is valued at $400,000 and you owe $300,000 on your mortgage. In this scenario, your home has approximately $100,000 of equity.

If you were to sell your home at market value, you would make about $100,000, minus fees and expenses. Home equity loans allow you to keep your home and access some of its value.

A suburban home

However, you won’t be able to borrow the full amount of equity — in this case, $100,000.

When determining how much you can borrow, lenders assess your loan-to-value (LTV) ratio. This metric reveals what percentage of your home’s value is financed and what percentage is not. Using the figures in the example above, your loan to value would be 75% ($300,000 loan balance divided by $400,000 property value).

When you obtain a home equity loan, the amount you can finance varies but say for this example, it is 80% total of the home’s value.

Therefore, if your home is worth $400,000, you cannot finance more than $320,000 in total. In this example, you owe $300,000 on your mortgage, so you could take out an additional loan for up to $20,000. You could use this $20,000 to pay off student loans and take care of other expenses.

Your home equity loan and mortgage are separate debts. You would still make payments on the $300,000 balance to your original lender. You would also make payments on the second loan of $20,000.

If you would prefer to have a single payment, you could apply for cash-out refinancing instead of a home equity loan.

However, during a cash-out refinance, the lender pays off your existing mortgage and becomes the sole lien holder on your home. This is a good option if you can obtain a lower interest rate on your mortgage while also accessing some of your home’s equity.

How Should I Refinance My Student Loans?

Home equity loans and cash-out student loan refinancing both allow you to use some of your house’s equity to repay student loan debts.

Cash-out student loan refinancing makes a lot of sense if you can get a lower interest rate on your mortgage, but the rate isn’t always the only factor to take into account. Every person has a different situation and quality of life should be weighed.

Using funds from one of these financial products to pay off your student loan debt offers many different benefits. By using your home’s equity to pay off student loans, you can:

  • Reduce your monthly recurring expenses
  • Reduce your debt-to-income ratio
  • Improve your financial health
  • Decrease the total amount of interest that you will pay on borrowed funds

If you want to explore the pros and cons of home equity loans and cash-out refinancing, we suggest that you connect with an experienced lender at CrossCountry Mortgage.

What Is the Fannie Mae Student Loan Cash-Out Refinance Program?

While both cash-out refinancing and home equity loans are great financial products, CrossCountry Mortgage offers a unique program that combines the advantages of both: the Fannie Mae student loan cash-out refinance program.

Our Fannie Mae student loan cash-out refinance program functions much like a traditional cash-out refi. However, one of the key differences is that we will pay out funds directly to your student loan lender to ensure that your debt is promptly paid off.

Want to find out whether you are eligible for this great program? Connect with CrossCountry Mortgage today!