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Consolidate Student Loans and Finance Home Improvements

Can I get a mortgage or home equity loan to both consolidate my student loans and pay for home improvements?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

If you have enough equity in your home it is possible to do a cash out refinance or take out a home equity loan to both pay off your student loans and pay for home renovations. If you only do one or the other, then there are more financing alternatives available to you.

As we outline below, the financing option that works best for you depends on how much equity you have in your home, the amount of proceeds you need and your financial priorities.

Cash Out Refinance. With a cash out refinance you can tap the equity in your property to consolidate your student loans and pay for home improvements. Because you are also required to pay off any existing mortgages on your property, a cash out refinance usually makes the most sense if you have significant homeowners equity and you need a significant amount of proceeds from the loan.

For example, for single unit property, the maximum loan-to-value (LTV) ratio for a cash out refinance is 80%. This means if your property is valued at $100,000, the maximum mortgage you are eligible for is $80,000. In this case, if you have a $50,000 existing mortgage balance then you receive $30,000 in proceeds from the loan, less any out of pocket closing costs.

Use ourCASH OUT REFINANCE CALCULATORto determine how much money you can take out of your home

We should emphasize that it is important to determine how much money you can take out before you apply for a cash out refinance. If you have a relatively low mortgage balance, that means you can receive a significant amount of proceeds to pay off all or part of your student loans and pay for property renovations. If you have limited equity in your home; however, then a cash out refinance may not give you enough money to accomplish both of your objectives.

Another potential benefit of a cash out refinance is that you may be able to lower your mortgage rate and monthly payment. The table below outlines refinance rates and fees for leading lenders near you. We recommend that you contact multiple lenders to find the best cash out refinance terms.

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Current Refinance Mortgage Rates as of October 23, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

Please note that with a standard cash out refinance, the LTV ratio is based on the pre-renovation property value which limits the mortgage amount you are eligible for. In short, when you apply for the mortgage you do not get credit for an increase in property value attributable to any home improvements you intend to make.

Home Equity Loan. Another way to access the equity in your home to consolidate student loans and pay for home improvements is a home equity loan. One of the main advantages of a home equity loan is that you can keep your existing mortgage in place, which is beneficial if you have attractive mortgage terms such as a low interest rate.

Additionally, a home equity loan may permit a higher maximum combined loan-to-value (CLTV) ratio, which is the ratio of all of the loans on a property to the fair market value of the home. Applying a higher CLTV ratio may enable you to receive more proceeds from a home equity loan than you can from a cash out refinance. Receiving more money allows you to pay off more of your student loans or increase your property renovation budget.

Also, even though you may receive more proceeds from a home equity loan, because the loan amount is smaller than a refinance, your total interest expense and closing costs are usually lower. In short, if you like your current mortgage terms and have a relatively low loan balance, then a home equity loan may be the right option for you.

The table below shows home equity loan terms and program information. We advise you to shop several lenders to find the lowest rate and fees.

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Current Home Equity Loan Rates as of October 23, 2019
View All Lenders

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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click for more information on rates and product details.

Similar to a cash out refinance, most home equity loans use the pre-renovation property value to determine the loan you qualify for, which may limit your proceeds.

Other Financing Options

If you decide to only consolidate your student loans or make home improvements -- instead of doing both -- then your mortgage options expand. You may be eligible for programs that enable you to qualify for a higher mortgage amount or better loan terms.

Student Loan Cash Out Refinance. As the name suggests, a student loan cash out refinance enables you to use the equity in your home to consolidate student loan debt, including debt you are responsible for as a parent. The main benefit of a student loan cash out refinance is that your mortgage rate may be lower than a standard cash out refinance, which reduces your monthly debt expense and saves you money.

Review our Student Loan Cash Out Refinance Guide

The downside to a student loan cash out refinance is that the loan proceeds cannot be used for other purposes. So you cannot use the mortgage funds to pay for property improvements.

Depending on your homeowners equity and other factors, one potential option is to use a student loan cash out refinance to pay off your student loan debt and take out a separate home equity or home improvement loan to pay for property renovations. That way you benefit from a lower mortgage rate and you are also able to finance your home improvements.

Home Renovation Mortgage Programs. If your focus is on improving your property rather than paying off your student loans, then you should consider a home renovation mortgage. These programs enable you to use a single loan to refinance your existing mortgage and finance significant property improvements.

Home renovation mortgages use the post-renovation property value to determine your LTV ratio, which increases the loan amount you are eligible for. Additionally, these programs permit a higher LTV ratio (97% and above) which also boosts the mortgage amount you qualify for.

Although you may be able to access more equity in your home and get approved for a higher loan amount, you typically cannot receive any proceeds from a home renovation mortgage so it is not helpful if you want to consolidate your student loans. Additionally, depending on your mortgage amount and LTV ratio, you may not have enough equity to qualify for a home equity loan after your property renovations are complete.

If you primary goal is to pay for home improvements and you have limited equity in your home; however, then a home renovation mortgage program may be a good fit for you. The most popular home renovation programs include the HomeStyle Renovation, CHOICERenovation and FHA 203(k) mortgage programs.

Review Best Home Renovation Mortgage Programs

You can use the FREEandCLEAR Lender Directory to search by multiple criteria including location and loan program. For example, you can find top-rated lenders in your state that offer multiple home renovation mortgage programs.

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Sources

Cash Out Refinance Guidelines: http://www.freddiemac.com/singlefamily/factsheets/sell/cashoutrefi.htm

Student Loan Cash Out Refinance: https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html#Student.20Loan.20Cash-Out.20Refinances

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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