Consolidating student debt into your mortgage might be a smart play

You’ve already hit some major milestones in life – you got a degree and you bought a home. Now that you’ve crossed that bridge, you may find yourself asking how you’re ever going to pay off those debts. Homeowners refinance their mortgages for many reasons and debt consolidation is high on that list. Refinancing can be a smart way to merge payments and pay off debts with more efficiency.

You can benefit from a lower interest rate

This might be the single biggest pro for consolidating student debt into your mortgage. Right now, the fixed federal student loan rate is 2.75% for undergraduates (for the 2020-2021 school year). Although this rate is at historic lows, this doesn’t take into account private student loan debt, which can be as high as 12%.

In most cases, the interest rate you pay on your mortgage is considerably less, and can save you money over the life of the loan by consolidating into the loan amount of your mortgage.

You can take extra cash out to pay for other expenses

When refinancing, you might opt to take additional cash out of your home through a cash-out refinance. Cash-out refi is a great option for paying down higher-interest debt, tackling home improvement projects, vacation, or a variety of other situations that require a lump some of cash.

There are a couple things you need to keep in mind if you decide to take out additional cash. Most importantly, you need to have sufficient equity built up in your home. Your Loan-to-Value Ratio (the outstanding, total balance of the loan versus the value of the home) needs to stay below 80%. Refinancing with cash-out could also increase your interest rate that you’ll pay. Keep this in mind, and you can talk with one of our mortgage experts to see if this option makes sense for you.

You can shorten the life of your loan

By pursuing any refinance strategy, you’re migrating loans. In other words, you might be able to reduce the amount of time you’ll be paying the loan off. For example, let’s say you’re 6 years into a 30-year mortgage. You have 24 years left until the loan is paid off. However, if you have the budget to increase loan payments, you can get this paid off sooner. By consolidating into a mortgage with a lower time frame (say a 15 or 20-year loan), you’ll have the loan paid off and save even more in interest payments.

But remember that by shortening the loan term, your monthly payment will almost certainly increase. Consolidating debt and shortening the timeframe of the loan should only be done if your budget allows.

You can keep your finances in order

The resulting efficiency of payments when you consolidate debts can make life significantly easier. If you are someone that prefers to have all of your payments come from one place, streamlining your bills might be the right plan for you, especially if you have student debt from more than one institution.

Still not sure if consolidating your student debt is the right thing for you? Talk to one of your experienced Mortgage Experts today and start building a plan to pay off that debt in the most cost effective way.