More and more Americans are building up debt, while at the same time looking for options to manage it. Typical choices include loan modifications and balance-transfer credit cards which are practical options to consolidate or pay off the outstanding balance owed. Also, for students, a rolling load debt into a mortgage is a further option.
By far the most common debts are student loans and mortgages. The largest consumer debt is for mortgages, which stands in the region of $9 trillion and followed by student loans at $1.5 trillion which is a sum that is ever increasing.
According to Fannie Mae, which is a major buyer of mortgages in the United States they created a new package tailored for the mortgage holders with a student loan. This type of mortgage is referred to as a student load cash-out refinance. It gives borrowers the option to clear the balance of their student loan by mortgage refinance.
This type of load will not be subject to the loan-level price adjustment that is typical with this transaction. Price adjustment can vary from customer to customer and relates to factors like debt-to-income ratio and credit score. The loan can be subject to customers paying 1% in order to get approved.
The option to use a fresh load to pay off another loan is known as debt reshuffling. While this may help to reduce the number of monthly bills to pay, the idea of debt reshuffling isn’t perfect. The outstanding debt you owe is still the same and you have simply changed the terms and conditions, as well as giving up certain protections that may be useful in the future.
The ability to consolidate loans can give a feeling that you are making headway. You are given the option to clear to sizable student loan.
However, the student loan debt is increasing the value of your mortgage and reducing the amount of equity. For this reason, it is very important to carefully consider the options.
Lower monthly interest
Ideally, you want to be in a position of owning your home outright. But, this type of debt consolidation means you are losing home equity up to the amount of the student loan.
A typical benefit of mortgage refinancing is the ability to lower the total amount of interest paid each month. Also, the private loan and PLUS loans have the potential to save a lot more money compared to those that relied on a subsidized federal student loan.
Anyone that plans to roll a high interest student loan into their mortgage will need to be financially savvy to get the best deals.
On average, a fixed rate mortgage with a term of 30-years is in the region of 4.41%, which compares with an average of 5% for the subsidized loan. Also, the PLUS loans are 8% and unsubsidized loans are 7.7%.
Additionally, the student loans are likely to run for a much shorter term compared to the popular 30-year mortgage term. So, essentially you could be paying a lot more interest if the mortgage is left to run its full term.
Beyond the potential to save money, the fine print in the documents issued for consolidating a loan is often quite misleading and confusing.
This can complicate matters further for the typical consumer. To avoid missing something of importance in the fine print it benefits to hire an accountant or consulting an actuary to make sure there is no downside to accepting this type of financial transaction.
It is useful to get proper financial advice that can say whether or not you will benefit from having the student load rolled into the mortgage. Any advice should be entirely independent from the bank or other company that is handling the refinance.
Likely to lose helpful protection
The process of consolidating a mortgage and student loan means there is the risk of losing built-in benefits. A typical benefit is the ability to defer a student loan in the event of losing your job. This can mean the student loan payment is reduced or completely stopped. Also, you are no longer in a position to apply for one of the federal loan forgiveness programs.
Direct consolidation loans, FFEL loans, Federal Perkins loans, Federal Stafford loans and direct subsidized loans are interest-free during a period of deferment.
However, if the student loan becomes part of the mortgage, this perk is no longer available. In the event of non-payment of the mortgage there is the risk of your home being foreclosed.
There may be more appropriate ways to pay off the student loan. Other options include student loan refinancing and federal loan repayment programs which are both worth exploring.
Your home is put at risk
While you get to lower the monthly interest paid, you are increasing the total mortgage amount. This has the potential to increase the risk of not being able to stay on top of repaying your mortgage. For instance, if you add a student loan totaling $26,500 at 5% over a 15 year period, your monthly mortgage payment is likely to increase by nearly $210 per month. Over the course of this 15 period, the interest paid will be in the region of $11,500.
The increased debt added to the mortgage means the total equity is reduced. In the event the market value of your home declines, there is the risk of being in a position of having negative equity, which is certain to complicate matters if you plan to sell in the future.
Before rolling the student loan into the mortgage, make sure to check the overall loan to value (CLTV) ratio.
In general, it is essential to carefully consider the options that match your personal circumstances because there is no one-size-fits-all solution. For those with a reliable income that gives the option to pay down the loan faster, this can make financial sense. However, for others, the benefits aren’t the same and more risk is involved.