People who are stuck with high-interest student loan debt might consider rolling it into their mortgages. This practice is known as debt reshuffling. It allows borrowers to take equity out of their homes to pay their student loan debt. They pay their student loans off and then make the extra payments on their mortgage.
In order to take advantage of debt reshuffling, borrowers first need to have equity in their homes. In general, the loan cannot account for more than 80 percent of the home’s value. Also, the borrower must meet underwriting standards. While these differ from lender to lender, most lenders require that the new mortgage payment isn’t more than a third of the borrower’s gross income.
Benefits of Debt Reshuffling
Rolling student loans into a mortgage comes with some major benefits. First, it reduces the number of monthly payments the borrower has to make. Instead of making mortgage and student loan payments, the borrower just has to make a mortgage payment. That means the borrower will likely have more disposable income as well.
Lower interest rates are also a huge benefit. Especially in the current low interest rate environment, mortgage loans typically have lower interest rates than student loans, making this an attractive option for borrowers if they can take advantage of lower rates.
Borrowers can also qualify for tax deductions when they roll the loan into a mortgage. Mortgage interest is usually tax deductible, and while some student loan interest is also tax deductible, there are limits when it comes to student loans. Borrowers can avoid those limits by rolling the loan into their mortgage.
Debt reshuffling also has some drawbacks. First, when people reshuffle their debt, they are increasing the amount of secured debt they carry. If they fail to pay the secured debt, their home will be seized. That is not the case if they default on unsecured student loans.
Also, while interest rates are lower on mortgage loans, borrowers end up paying more over the course of the loan. Borrowers could turn a 10-year student loan into a 30-year loan when they roll it into their mortgage. That means the interest can actually add up to more over the course of the loan. That’s why it’s so important to run the numbers before committing to this type of loan.
Borrowers also lose the flexibility that comes with student loans when they reshuffle their debt. They can no longer apply for forbearance or qualify for debt forgiveness. They have to make those monthly payments no matter what when they roll the debt into their mortgage.
Is It Worth It?
The answer can be both yes and no. It depends on the borrower’s situation. For instance, someone who has a low-interest Perkins loan should probably just keep paying it. If you can qualify for standard student loan refinancing, then that might be a better option as well. However, someone who has a high-interest private loan might benefit from rolling it into the mortgage.
Borrowers are encouraged to crunch the numbers to determine if it makes sense for them to roll their loans into their mortgage. If they believe it’s a smart move, they can contact their mortgage company to see if they qualify for refinancing.