Americans owe more today in student loans than ever before and student debt is continuing to rise. As these borrowers start into their careers and become homeowners, they may have the opportunity to consolidate their student loan debts with their home loan. If this sounds intriguing to you, here’s what you need to know before talking to your lender:
How Does Consolidation Work?
If you have enough equity in your home, you can refinance to pull cash out and pay off all your student loans. This means that both debts will now all be paid off together through your monthly mortgage bill. Your overall home loan will now be larger.
The rationale behind consolidation is that by rolling your student loan debts into your mortgage you will be saving money because interest rates are generally lower on home loans than on student loans, especially private loans. Mortgage rates often run 3% -5% lower than student loan rates. This can be very beneficial if you have multiple student loans with different interest rates. Getting out of adjustable rate loans can bring a lot of peace of mind as well.
Student loan debt is also notoriously difficult to discharge in the case of financial hardship. Even if you declare bankruptcy, your student loan debt will not be wiped out and your earnings can be garnished if you are not making the monthly payments according to the loan terms. By paying off your student loans with your mortgage, those issues are eliminated.
It also simplifies your debt by creating one monthly instead of two or even several. This makes it easier to stay on top of your debt if you have only one payment to remember each month.
Be sure to do the math and read the fine print when deciding whether or not to consolidate. You may get a lower interest rate overall but if your student loans were originally due after 10 years and you have now rolled them into a 30-year mortgage, you may end up paying just as much interest over the life of the loan.
And of course, this will increase your monthly mortgage bill. If things get tight financially at some point, it may be harder than before to make your payments and you could lose your home to foreclosure.
One more thing to consider is that by consolidating your student and mortgage loans, you will be forfeiting certain loan benefits. With federal student loans, if you become unemployed you can ask to have your loans deferred. That is not usually an option with home loans. And there are plenty of federal loan forgiveness programs that could help you erase your debt faster, but those will be unavailable if you consolidate.
Rolling student loan debt into a mortgage is not the best option for all homeowners but in some cases it can be a huge benefit to those staggering under the weight of high interest college debt.
Call us today at 805-582-9400 and we can talk you through the pros and cons of rolling your student loans into your mortgage. If you decide that rolling your student loans into your mortgage is right for you we would love to give you a free, no obligation quote.