Often times student loans get in the way of the mortgage because of the tremendous monthly debt, but fintech lender SoFi hopes to create the opposite effect.
They\’ve launched their so-called \”Student Loan Payoff ReFi,\” which when the name implies, is a method to get rid of student loan debt while refinancing the mortgage.
The general idea is the fact that mortgage rates (at the moment) are a lesser amount than the interest rates on so to speak ., meaning borrowers can save money by shuffling debt for their existing mortgage balance.
Apparently 8.5 million households have student debt obligations, which means this mechanism could equal loads of savings, and a lot of originations for SoFi.
The program is it being offered in conjunction with Fannie Mae, and is apparently cheaper than a traditional cash out refinance.
How the SoFi Student Loan Payoff ReFi Works
Say a student (or I\’m assuming a parent) owns a home which has a mortgage balance of $200,000 at 67% LTV, as there was also outstanding student loan debt of $40,000.
This hypothetical homeowner can combine each debts into one and luxuriate in a lower interest rate, despite a higher LTV.
This example would push the LTV to 80%, likely the most under the program, but the rate would certainly be a competitive 3.75% or so for a 30-year fixed.
The payment would be even cheaper because school loans often amortize over a shorter period, like 20 years. But the lower combined rate would counterbalance the longer amortization period.
SoFi will actually disburse the funds straight away to the servicer of the student loan debt, instead of just giving the borrower cash at closing.
Because the total funds are going straight to the student loan service, instead of the bank account of the homeowner, you can find less perceived risk.
After all, generally homeowners are welcome to tap equity to use for whatever they\’d like, including paying back other loans. But lenders assume more risk when the funds can be used for any purpose, just like buying a Hummer.
This might explain why the interest rate rates on this product tend to be competitive than typical rates tied to a cash out refinance.
Still Explore All Options
Borrowers can get a rate closer to what they\’d plan to receive via a rate and term refinance, the latter of which involves no cash into the borrower.
It might also be easier to qualify if the to-be-paid-off student loan debt no longer bumps the DTI ratio to unacceptable levels.
This program works well with both those who manage their particular student debt and those who have a co-signer on the student loan such as a parent.
Per Experian data, the normal homeowner with an outstanding co-signed student loan has a balance of $36,000, while people with Parent PLUS loans have $33,000 in outstanding debt.
The Parent PLUS loan may be a private offering and apparently 90% of non-public student loans required a co-signer. Furthermore they tend to come with interest rates that will be higher than current mortgage rates.
The one disadvantage to a program like this is that the funds could only be used for one purpose. Plus your home loan debt will grow, that could potentially put your primary residence in danger.
As noted, a traditional cash out refinance enables you to tap equity and use funds for any excuse. In a nutshell, you get more flexibility.
However, the interest rate rate might be higher than this supplement from SoFi. Of course, you\’d still want to shop around to see if you can get good both worlds.
You might be able to snag a lower rate without sacrificing any flexibility.