Refinancing your student loans with a second mortgage could help you get lower rates and monthly repayments — especially for parent borrowers who own their home. It could also come with tax benefits for high-income borrowers. But it comes with several risks, including less flexible repayments that could cost you your home.
How does refinancing with a home equity loan work?
Refinancing your student loans with a home equity loan or home equity line of credit (HELOC) involves taking out a loan against the value you own in your home and using those funds to pay off your student loans.
Mortgage lenders like SoFi and Fannie Mae offer cash-out refinancing programs that guide you through the process of getting a home equity loan to refinance your student debt. Cash-out refinancing generally targets parents who took out loans for their children and high-earners with private student loans.
Home equity loans can have lower rates than private and expensive federal student loans, plus they come with tax benefits that allow borrowers with high income to deduct interest payments from their taxes.
How do I refinance my student loans with home equity?
Follow these steps to take out a home equity loan to pay off your student debt.
Step 1: Find out how much your home equity is worth
The first step to refinancing a student loan with home equity is contacting your lender to find out how much equity you actually own. This could involve a home appraisal. With other lenders, you might not need to have your home appraised until after your initial approval.
Compare rates, fees and other benefits available through different lenders. Often you can find out what rates and terms you might be eligible for by filling out a quick prequalification form online.
Step 3: Get a payoff amount for your student loans
Depending on your lender, you might need to provide the exact amount you need to completely pay off your student loans upfront. Others might not ask for your exact payoff amount until later in the application process. Either way, you’ll need to contact your student loan servicer to request your payoff amount.
Step 4: Apply for the home equity loan
Follow your lender’s directions to complete the application. You’ll also need to submit documents verifying your identity and showing that you’re able to afford repayments. These might include:
Recent tax returns
Student loan statements
A government-issued ID
Step 5: Pay off your student loans
What happens next depends on your lender. Some lenders like SoFi will take care of paying off your student loans with your home equity loan for you. With others, you might have to pay off your student loans yourself.
If you’re required to pay them off yourself, contact your servicer for instructions — often there’s a specific procedure for making a final repayment. In both situations, check your account to make sure the repayment has completely gone through. If you have any questions, contact the customer service team of your old servicer or new lender for help.
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How can I benefit from refinancing with a home equity loan?
From simplified repayments to potential tax benefits, here are some perks of refinancing your student loans with a home equity loan.
Potentially lower rates. Home equity loans typically have lower rates than student loans in recent years, helping you save on the monthly and overall costs.
Consolidate your loans. Refinancing multiple student loans with one home equity loan can simplify your repayments.
Lower repayments. You generally can’t get a student loan with a term longer than 25 years unless you consolidate your loans, but mortgages can go as long as 30. This can translate into lower monthly repayments — though you’ll likely pay more in interest in the long run.
Putting your home at risk of foreclosure is just one of the potential drawbacks of paying off your student loans with a home equity loan. Other risks include:
Losing your home. Defaulting on a home equity loan means your home could go into foreclosure. While student loans also come with serious consequences, you likely won’t lose your home as a direct result.
Less flexibility. By refinancing with a non-student loan, you lose access to flexible repayment plans, deferment and forbearance that give you some leeway if you run into a financial catastrophe.
Losing eligibility for forgiveness. Student loans — especially federal loans — are eligible to have all or part of the debt canceled if borrowers apply for forgiveness, loan repayment assistance or discharge. You lose that as soon as you refinance with a home equity loan.
Turning an asset into a liability. Home equity is often a borrower’s biggest financial asset. You lose that when you use it to pay off another debt.
If you have multiple types of student loans, you may want to determine which ones you need to pay off first. If your private student loans have higher rates, one option is to refinance those with your home equity while paying off your federal loans directly.
When refinancing your student loans with a home equity lender or student loan company, you often have a choice between fixed or variable rates. Variable rates sometimes appear to be lower than fixed rates, but they have the potential to increase or decrease depending on movements in the lending market.
This can give you unpredictable monthly repayments and might land you with a higher rate than you initially expected. That might not be a risk you’re willing to take when your home is on the line. Read our guide to fixed and variable rates before you decide what type of interest to go with.
Alternative ways to pay off student debt
Refinancing with a home equity loan isn’t the only way to save on your student loans or get out of debt faster. Consider looking into the following alternatives before putting your house on the line:
Refinance with a private lender.Student loan refinancing companies usually allow you to keep the perks that come with student loans. That means you’ll likely still be eligible for the same tax deductions, forgiveness and forbearance options that you won’t get with a home equity lender.
Change your repayment plan. Federal loan holders have a wide range of repayment plans to choose from that can stretch as long as 25 years or 30 if you have a Direct Consolidation Loan. A new repayment plan can lower your monthly repayments, though it won’t change your rates.
Refinancing student loans with a home equity loan might give parents and high-earning borrowers access to longer terms and lower rates. But there are alternative ways to get more favorable rates or terms without putting your home on the line.
Yes, you can use a home equity loan or line of credit to cover educational expenses. Some parents prefer this option to a parent loan since they can sometimes get more favorable rates and terms with a secured loan.
Yes, there are several cash-out refinance options if you’re a homeowner who’s paid off their mortgage. In fact, since you fully own your home, you’ll have a better chance to cover all of your student debt with a home equity loan — depending on the value of your home and how much you owe.
It depends on your lender, but typically you’ll need to have at least 20% equity in your home to get a competitive deal. You could get a home with as little as 5% equity, but you might not get as favorable rates and terms.
It depends on the type of mortgage and student loans you have, as well as the interest rates and tax benefits of each. You might want to focus on paying off an adjustable-rate mortgage first to avoid an interest rate hike. Though it can be helpful to prioritize student loans if you have a large debt load and long term. You can learn more with our guide to paying off student loans versus a mortgage.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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