Use Your Home Equity to Eliminate Your Student Loans

11/07/16Colin Grubb

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Do you have student loan debt? Do you own a house? Did your parents cosign your student loan? Are they homeowners themselves?

Lisa Simmons began paying back her student loans upon her graduation in 2013. She owed about $50,000 at 6.8%. The term she chose was 20 years and she's been reliably paying the monthly minimum of  $381.67. After three years, she'd  paid down the principal to $46,000.

“My rate wasn’t the best," Lisa says. "I mean, it was normal for the time but they’ve fallen since then. It irritates me when I see the kind of rates people are getting today. I feel like I’m paying more than I have to. I saw the new SoFi program and I couldn’t believe my luck."

What Lisa is talking about is SoFi’s innovative Student Loan Payoff Refinance program. If you are a homeowner, or someone cosigned your student loan and they are a homeowner. SoFi’s program allows you to remove equity in your house in the form of cash in order to partially or fully pay off your student loan. It is potentially a game changer considering the amount of American's currently under enormous school debt.

Student Loan Payoff Refinance works the same as traditional cash out refinance but is actually a better deal for a couple reasons.

Typically, in cash-out refinance, you refinance your home for a different rate/term but also remove some of the equity as cash. People use the cash for anything, home improvements, medical bills, and credit card consolidation are some popular uses. The cash you take out is added to the new mortgage principal.

If you’re lucky and taking advantage of particularly good rates, you can get access to cash and still pay less on a monthly basis.

With Student Loan Payoff Refinance the “cash out” is applied exclusively to your student loan debt.  This is potentially a good deal because of two factors.

  1. There's a good chance the rate you get with the refinance could be lower than the rate you are currently paying on the student loan.

  2. You are getting an even lower rate than a typical cash out refinance because instead of handing the money over to you to do with as you will, SoFi takes the money and pays your loan provider directly.

As with all mortgage refinancing, lenders are looking for a Loan to Value (LTV) percentage of 80% or lower in order to qualify. Put simply, they don’t want you to still owe on your mortgage more than 80% of what the house is worth.

“I just started working at an ad agency,” Lisa explains. “I am currently renting, but my parents own the home I grew up in. I mentioned it in passing and they were actually already considering refinancing because the rates they were getting quoted were so low. They cosigned my student loan I should add.”

The Simmons' home was appraised at $350,000, they owe around $225,000 on the mortgage giving them a qualifying LTV of about 65%. They refinanced with SoFi’s program and cashed out the $46,000 remaining on Lisa's student loan.

At a great rate of 3.1% Lisa's parents refinanced their home for the remaining 20 years of their mortgage, eliminated Lisa's student loan debt, AND managed to get a lower monthly mortgage payment in the deal.

“We worked out how much of the monthly payment is my student loan and I give them that every month, Lisa says. "So not only are they paying a smaller payment but their getting some extra money from me. It was a win-win for all of us.”

Although this looks extremely attractive, before getting started make sure to take one thing into consideration. Your student loan rate may be higher, but with this program you will now be extending the student loan to the term of your mortgage, which is typically longer.

It’s a good idea to calculate the interest alone on the cash out loan payoff for the entire mortgage as to what it would have been if you continued to pay the loan as it was and see if it makes sense, i.e. if you end up paying more interest on your student loan over the long term with the refi. Other credit score and income qualifications also come into play. 

If this sounds interesting why not check out our advertising partner SoFi’s options when it comes to refinancing your student debt.

 

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