Is rolling student loan into a mortgage a good idea?
Basically, you want to refinance your current mortgage and with the excess money you want to pay off the student loan debt. The new loan may be another home equity loan to an existing mortgage that enables you to get some cash already paid towards the mortgage. Then, you want to use the cash to pay off your student loan. But the thing is - why you would do that? Maybe the reasons are:
- Taking benefit of low-interest rate
- Lower monthly installments
- Enroll in money saving programs (tax benefits or federal benefits)
Refinancing your mortgage to pay off student loan might seem easy to hear and think, but it’s actually complicated and riskful enough to consider it. Let's find out when this student loan debt payment strategy works well and in what financial circumstances.
Risk 1. Student loans and mortgages shouldn’t mix together
The mortgage is a secured debt, which means there would be an asset deposited as collateral (your house), and you’ll get the collateral back when you pay off the debt owed. If you can’t afford to pay back the money or fall behind the payments, the lender or bank can grab your home through the foreclosure process.
On the other hand, a student loan is an unsecured debt, and the bank or lender can’t take away any assets from you (without any collateral) if you fail to pay off the loan. But, if you fall behind the monthly loan payments, the bank can garnish your wages. , that easily in the case of bankruptcy.
So, if you deliberately shift your student loan to your mortgage and anyhow become incapable of maintaining the new monthly payments, you’ll surely put your home in the grasp of the foreclosure. It’s wise to hold your DTI or debt-to-income ratio within a manageable limit, practically below 36%, and doing a job to make the monthly student loan payments comfortable.
If you can't manage your present monthly installments, you mustn’t add a student loan to the mortgage. You rather choose an alternative earning-driven program for student loan repayment.
Risk 2. Interest rate matters
You can compare the mortgage and the student loan interest rates all by yourself. If your student loan carries a higher interest rate than your mortgage loan, you can save enough money by rolling the student loan into your mortgage with a low rate of interest.
But, on the other hand, if your student loan interest is lower than your current mortgage interest rate, then mortgage refinancing can’t be as effective as you think. It’ll be very difficult for you to find a lower interest rate via refinancing.
Risk 3. Changing loan terms may cost you more
Using mortgage refinance option to pay off student loans practically extends the loan term of the basic student loan from 10 years to 20 years or may be 30 years. It’s because you’re transforming an unsecured, short-term loan into a secured, long-term loan. With a longer term, you'll actually find yourself paying up more interest over time.
Risk 4. Hidden costs and rules
Make sure you have included the closing costs of the mortgage into your analysis, as this cost will surely include few thousand dollars to your mortgage loan total. Also, you need to find some unfavorable mortgage terms that engage you in a variable rate of interest longer than you want. Lastly, you must also look out for the loan term. The longer term you choose to pay off the mortgage, the more interest you’ll pay to your lender over time.
At the end, it is sure that you must always have to do your homework before making this big decision. Speaking with a certified professional who knows the rules and present financial market well, would be nice for your finances.
Don’t miss out: The student loan defaulter FAQ