Rolling Student Loans Into a Mortgage

Can you roll student loans into a mortgage?

You can’t literally combine student loan balances with your existing mortgage, but you can use your home equity to pay them off in full. This effectively “rolls” the student debt into your mortgage by replacing your independent student loan payments with higher monthly mortgage payments.

This strategy can simplify your monthly bills, but it also changes the debt's risk profile. Once the loan balance is tied to your home, missing payments puts your property at risk.

What is home equity?

Home equity is the difference between your home's value and what you still owe on your mortgage. If you sold your home, the equity is what you’d walk away with (after paying the mortgage and selling costs).

Several types of loans let you access your home equity, including:

• Cash-out refinance
• Home equity loan (second mortgage)
• Home equity line of credit (HELOC)
• Reverse mortgage (less common, typically for older homeowners)

How does rolling student loan debt into your mortgage work?

To roll your student loans into your mortgage, you have to refinance your current mortgage or take out a second home loan, then use the equity to pay off your student loan balances.

Whether you use a cash-out refinance or another type of mortgage refinance like a home equity loan, you use the proceeds to pay your student loans up to the exact “paid-in-full” amount. This eliminates your student loan balances, leaving you with a single monthly payment to your mortgage lender.

Example of the math

Say your home is worth $500,000 and you owe $300,000 on your mortgage. You might be able to borrow $100,000 through a cash-out refinance if you have enough equity and qualify. In this scenario, you could refinance into a new $400,000 mortgage and use the first $300,000 to pay off your existing mortgage balance.

A new, lower interest rate doesn't automatically mean a cheaper loan if the repayment term gets much longer.

The remaining $100,000 is deposited into your bank account as cash. You then use that $100,000 to clear your student loans.

While your student loans are gone, you now owe $400,000 on your home. If you choose a 30-year mortgage, you’re stretching your student loan payments over three decades. That extended timeline could cost you more in interest than you would have paid on the original student loan schedule.

Fannie Mae student loan cash-out refinance

Fannie Mae’s student loan cash-out refinance feature can help lower the cost of this strategy. This program waives the standard loan-level price adjustments (LLPAs) that usually make cash-out refinances more expensive than standard refinances.

Under the program, at least one borrower must be obligated on the student loan, and the loan must be paid in full rather than partially. Fannie Mae pays off your lender directly at closing, guaranteeing the funds are used to pay off the student debt and making it easier to roll your student loans into your mortgage.

» RELATED: Should you refinance your house to pay off student loans?

How to roll student loans into a mortgage

If you want to use your home equity to pay off student loans, here’s what the process usually looks like.

1. Calculate your available home equity

Start by finding out how much equity you have in your home. For traditional cash-out refinances, lenders generally allow you to borrow up to 80% of your home’s value (called the loan-to-value ratio, or LTV).

That doesn't mean everyone can access 80% of their home’s value in cash. Your existing mortgage balance, credit, property type and the lender’s rules all affect the amount you can actually borrow.

2. Choose a loan type

Once you know how much equity you can access, you’ll pick a loan type. A cash-out refinance is a great fixed-rate option if market rates are low and you’re comfortable with the term, but a HELOC may be a quicker, more flexible option for your needs.

3. Apply for the loan

You’ll need to complete an application for your chosen loan, including providing personal and financial information. Lenders will evaluate your credit score, employment history, and debt-to-income (DTI) ratio. Make sure you have good credit. Otherwise, you’ll pay a higher interest rate that can erase the benefits of this strategy.

4. Provide financial documentation

To complete your loan application, you may need to provide:

• Proof of identity
• Recent bank statements
• Signed tax returns
• W-2 forms or recent pay stubs

5. Use funds to pay off student loans

Once the funds are available, use them to pay the student loans immediately so the balances are actually cleared. If you use a standard cash-out refinance, the lender deposits the equity proceeds into your personal bank account after closing. If you’re using a program like Fannie Mae’s student loan cash-out refinance, the payoff is handled directly at closing rather than routed through you first.

Pros and cons of rolling student loans into a mortgage

While rolling your student loans into your mortgage can possibly lower your payment and help you consolidate multiple loans, there are risks. Here are the pros and cons of paying off your student loans with your mortgage to consider before making a decision.

What to consider before consolidating student loans into a mortgage

Before you use home equity to pay off student loans, check the numbers carefully. Here are a few things you should consider:

Can I afford the payments?

This process is only helpful if you can comfortably afford the new mortgage or HELOC payment over time. If you face a job loss or financial hardship, defaulting on student loans can harm your credit score — but defaulting on your mortgage (or HELOC) because payments are too high can result in foreclosure.

Interest rates and loan terms

Analyze the total cost of debt over time rather than focusing just on the interest rate. Even if the rate is lower than your student loan rate, stretching the payments over 20 or 30 years can cost significantly more in the long run.

Compare rates from multiple mortgage lenders and ensure the loan term aligns with your student loan payoff plan so you don’t pay more interest than necessary.

Tax impacts

By consolidating federal student loans, you’re permanently transforming them into private mortgage debt. This means you may instantly forfeit access to federal safety nets. Consider the tax implications of paying off your student loans and whether refinancing is worth it in your situation.

Loan costs vs. savings

Most mortgage refinances come with origination fees and other closing costs. So, it’s important to review the costs and calculate potential savings before deciding whether to roll your student loans into your mortgage.

Alternative ways to manage student loan debt

If your main goal is a lower payment or a lower rate, there are other options besides rolling your student loans into your mortgage:

• Refinance your student loans to get better rates and payoff terms, especially if your credit score and income have increased since you graduated. This route may reduce your rate without putting your property on the line.
• Get a federal loan consolidation if you mainly want a single monthly payment instead of multiple payments.
• Student loan repayment assistance is available as a benefit through some employers. This can help you pay off your loans faster without modifying your mortgage debt.

FAQ

Bottom line: Should I roll my student loans into my mortgage?

Rolling your student loans into your mortgage can lower your monthly payments and consolidate several loans into a single payment. But you lose access to federal loan benefits, and you effectively tie your student loans to your home, which is risky.

The right choice depends on whether you value a lower payment more than the added risk of using your home as collateral. As with any debt consolidation option, it’s important to review your options and calculate the potential savings before deciding to roll your student loans into your mortgage.