Mortgage lenders have long provided borrowers with ways to roll various expenses into their new home loan.
You can include loan fees and closing costs into your total loan balance. Some homeowners even ask to borrow more than the actual price of the home, so they can use that cash on necessary upgrades and repairs.
Before now, you could never roll something like student loan debt into a new or refinanced mortgage. But thanks to companies like SoFi, that’s changing.
SoFi has partnered with Fannie Mae to offer a financial product that allows you to roll your student loans into the balance of your refinanced home loan. It’s called a student loan payoff refi, and it could benefit millions of homeowners who also carry student debt.
Curious about how this product works? Here’s what you need to know before trying a student loan payoff refi for yourself.
What’s a student loan payoff refi?
SoFi’s new financing option allows you to pay off your student loans through a cash-out refinance. You make your student loan debt part of the new mortgage you originate when you refinance your home.
With a student loan payoff refi, the lender takes your student loan balance and consolidates that with your existing mortgage. Then, they refinance the total into a new mortgage loan. At this point, your student loan debt balance is completely repaid and you’re free of that particular debt.
The biggest benefit: lower interest rates
That doesn’t mean the amount you owed on your loans just disappears — whatever student debt balance you carried is now part of your new mortgage loan. You still need to pay back the same amount of money, but a student loan payoff refi allows you to do so in a way that may be more manageable for you.
Mortgage loan terms usually range from 15 to 30 years. Consolidating your loans with your mortgage refinance could generate lower monthly payments for you if your student loans came with a shorter term than your home loan.
Thanks to interest rates on mortgages remaining low, consolidating your student loans into a refinance on your home could provide you with a lower interest rate, too.
Federal student loan interest rates depend on what type of loan you have. You could pay over 6% in interest, and private student loans usually feature even higher rates.
A 30-year, fixed-rate mortgage, however, has an average interest rate around 3.6%. Depending on the type of student loan you have and the interest rate you can qualify for with your refi, you could cut your interest rate on your student debt in half.
The drawbacks of a student loan payoff refi
This can provide a great opportunity for the right individual, but getting a lower interest rate isn’t guaranteed. You may not save much in interest if your rate stays the same.
You could even end up paying more in interest if you stretch out the loan term too long. The faster you repay your student loans, the less in interest you’ll pay over time.
A student loan payoff refi can reduce your monthly payments when you lengthen the loan term. That helps your day-to-day cash flow, but it could cost you a lot in the end because you took so long to repay that debt.
Refinancing doesn’t come without drawbacks. Lengthening the loan term and paying more in interest applies to your mortgage, too, and originating a new home loan means incurring new fees.
A refi can benefit you, but you must run the numbers first.
What does the math show? Do you come out ahead if you refinance and consolidate your student loans? Or does it cost you more by the time you’re done paying off all the debt?
You may still decide paying more over time is worth it if a refinance provides your cash flow with immediate relief. If you struggle with making your mortgage payment and your student loan payment each month, a refinance could help if it lessens your total monthly burden now.
Does it make sense to combine refinancing with student loan repayment?
A student loan payoff refi is a completely new product exclusive to SoFi for now. It’s designed to help homeowners better manage their student loan debt and can help you quickly pay off your student loans so you can focus on paying your mortgage.
But reaching instant freedom from your student debt may come with a cost that simply doesn’t make sense for your situation. Run the numbers for a variety of situations to see where you make out the best financially.
Remember the other options you can exercise, too, including refinancing your mortgage without rolling other balances into the new loan. You can also look into refinancing your student loans independently, or check to see if you could benefit from student loan repayment programs.