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How a Student Loan Cash Out Refinance Works

How a Student Loan Cash Out Refinance Works

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
  • Pros Cons
    • Access the equity in your home to pay off student loan debt
    • Potentially lower mortgage rate than standard cash-out refinance loan
    • Anyone with student loans, including parents who took out loans for their children, are eligible for the program
    • Restrictions on use of proceeds -- borrower cannot take out significant personal proceeds with new mortgage
    • Refinancing student loans separately may save more money in the long run
    • Program only applies to refinances and not home purchase mortgages
    • Loan limits
  • Student Loan Cash-Out Refinance Overview
  • A student loan cash-out refinance enables borrowers to use the equity in their homes to pay-off student loan debt when they refinance. Borrowers typically pay a lower mortgage rate on a student loan cash-out refinance than they would on a standard cash-out refinance, which is one of the primary benefits of the program. Additionally, a student loan cash-out refinance may enable borrowers to eliminate their student loans and reduce their monthly debt payments. Anyone with a student loan, including both the student or parents who took out a loan to pay for their child to attend college, can participate in the program.

    The negatives of a student loan cash-out refinance include strict limits on the use of proceeds, loan limits and potentially higher financing costs as compared to refinancing your student loans separately. Depending on your mortgage rate, program and length, a cash-out refinance may end up costing you more in total interest expense over the life of the loan, especially if you do not reduce the term of your original mortgage (for example if you refinance a 30 year mortgage with another 30 year loan). While the student loan cash-out refinance program represents an excellent opportunity for many borrowers to save money, you should compare your monthly debt expense, cost savings and total interest expense over the life of your new mortgage to keeping your current mortgage in place and refinancing your student loans separately.

  • CalculatorUse our CASH-OUT REFINANCE CALCULATOR to review the potential cost savings of a student loan cash-out refinance
  • How the Student Loan Cash-Out Refinance Program Works
  • The student loan cash-out refinance program was developed by Fannie Mae and is offered through participating lenders such as banks, mortgage banks, mortgage brokers and credit unions. These lenders make sure that applicants meet program eligibility rules and qualify for the mortgage according to Fannie Mae's borrower qualification guidelines.

    The table below compares interest rates and closing fees for lenders in your area.  Contact multiple lenders to determine if they offer the student loan cash out refinance program and to request loan proposals.  Comparing lenders and shopping for your mortgage enables you to find the refinance program and loan that are right for you. 

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    Current Refinance Mortgage Rates as of January 23, 2019
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click here for more information on rates and product details.
  • Student Loan Cash-Out Refinance Guidelines
  • Borrower Eligibility

    Anyone who is legally obligated to repay a student loan is eligible for a student loan cash-out refinance, subject to meeting the borrower qualification requirements outlined below. If co-borrowers are applying for the program, at least one of the borrowers is required to have a student loan.

    The program applies to both students and parents or relatives who have taken out or guaranteed student loan debt for someone else. For example, parents can use the equity in their home to pay off student loan debt that have taken out on behalf of their children.

    Use of Loan Proceeds

    In addition to paying off an existing mortgage, home equity loan or HELOC on the property, at least one student loan must be paid in full with the proceeds from the loan and the proceeds must be disbursed directly to the student loan lender. Borrowers are allowed to pay off more than one student loan but partial payoffs of student loans are not permitted. Additionally, the borrower cannot personally receive more than 2% of the loan amount or $2,000, whatever is lower, in proceeds from a student loan cash-out refinance.

  • Student Loan Cash-Out Refinance Requirements
  • As outlined below, student loan cash-out refinance requirements are similar to the qualification guidelines for a standard mortgage refinance.  Read the information below to determine if you qualify for a student loan cash-out refinance.

    Credit Score

    The minimum credit score required to qualify for a student loan cash-out refinance is 640. Please note that borrowers with lower credit credit scores pay a higher interest rate, are subject to lower a lower maximum debt-to-income ratio and are required to have more equity in their property (~25%). Borrowers with higher credit scores may be able to qualify for a lower mortgage rate.

    Borrower Debt-to-Income Ratio

    For borrowers with good credit profiles, the program permits a maximum borrower debt-to-income ratio of up to 50% to determine what size mortgage a borrower can afford. Your debt-to-income ratio represents the percentage of your monthly gross income that you spend on debt expenses including your mortgage, property taxes and insurance and other debt such as credit card, car and student loans. For example, if you earn $4,000 per month in gross income and the lender applies a debt-to-income ratio of 50%, you can spend $2,000 on monthly debt payments including your mortgage ($4,000 * 50% = $2,000). The higher the debt-to-income ratio, the higher the mortgage amount you qualify for.

    One of the positives of a student loan cash-out refinance is that your monthly payment on one or more of your student loans is eliminated from your debt-to-income ratio which can improve your ability to qualify for a refinance.

    Maximum Loan-to-Value (LTV) Ratio

    The student loan cash-out refinance program imposes a maximum loan-to-value (LTV) ratio of 80% for a single unit property which means the borrower must have sufficient equity in their home to both pay off their student loan(s) as well as their mortgage and any other debts against the property such as a home equity loan or line of credit (HELOC).

    Borrower Financial Reserves

    Depending on your credit score, loan-to-value (LTV) ratio, debt-to-income ratio and number of units in the property, borrowers are required to hold no reserves to up to twelve months of total monthly housing expense (mortgage payment, property taxes and homeowners insurance plus homeowners association (HOA) fees, if applicable) as savings in reserve at the time their mortgage closes. For example, for a one unit property, a borrower with a credit score of at least 700 is not required to hold any reserves at the time the mortgage closes. For a two-to-four unit property, a borrower with a credit score of at least 700 is required to hold two months of total monthly housing expense as savings in reserve when the loan closes.

    Borrower Employment History Requirement

    Borrowers are usually required to have two years of continuous employment history to be eligible for most mortgage programs, including a student loan cash-out refinance. It is important to highlight that military service and full-time education such as college or graduate school counts as employment history when you apply for a mortgage. This exception is especially important for borrowers who have recently graduated from college and who are looking to pay off their student loans.

    Borrower Income Limit

    The program does not apply borrower income limits.

    Our free personalized mortgage quote form enables you to review loan quotes from leading lenders. Our quote form is easy-to-use, requires minimal personal information and does not impact your credit score. Comparing multiple mortgage proposals is the best way to save money when you refinance.

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  • Student Loan Cash-Out Refinance Mortgage Rate and Costs
  • Mortgage Rate

    The mortgage rate you pay depends on many factors including your credit score, loan-to-value (LTV) ratio and loan program; however, the rate on a student loan cash-out refinance is usually lower than the rate on a standard cash-out refinance. Lenders typically add a premium to the interest rate on a standard cash-out refinance (also called a loan level price adjustment) but this premium is waived for student loan cash-out refinances, which results in borrowers paying a lower mortgage rate. Paying a lower rate may enable you to save more money when you refinance.

    Private Mortgage Insurance (PMI)

    Borrowers should not be required to pay private mortgage insurance (PMI) with a student loan cash-out refinance because the maximum loan-to-value (LTV) ratio permitted by the program is 80%. Borrowers are only required to pay PMI if their loan-to-value (LTV) ratio exceeds 80%.

    Extra Fees

    Borrowers are required to pay standard lender fees and closing costs with a student loan cash-out refinance. There are no extra fees associated with the program.

    Use the FREEandCLEAR Lender Directory to search for twenty-five mortgage programs including multiple refinance options.

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  • Mortgage Type and Loan Amount
  • Mortgage Program

    Both fixed rate mortgages and adjustable rate mortgages (ARMs) are eligible according to program guidelines. Interest only mortgages are not permitted.

    Loan Limit

    The student loan cash-out refinance mortgage program is subject to conforming loan limits, which vary by county and the number of units in a property. The loan limit in the contiguous United States for a single unit property ranges from $484,350 to $726,525 in higher cost counties. In Alaska and Hawaii the loan limit is $727,525 for a single unit property.

  • Property Eligibility
  • One-to-four unit owner-occupied residences, second homes and investment properties are eligible for a student loan cash-out refinance.

  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

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

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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