The Federal National Mortgage Association (Fannie Mae) is the largest backer of mortgage credit in our nation. Recently, Fannie set new rules and guidelines that would let homeowners refinance their mortgages to pay off student loans. The new guidelines expand a program that was introduced last year with a personal finance company called Social Finance commonly known as SoFi.
Fannie Mae said the resulting policy will be easier for borrowers to apply, and may result in a lower payment for borrowers with student loans. Fannie introduced this student loan ‘cash-out refinance feature’ as a possible cost-effective alternative than existing home equity loans to pay off the student loan debt. By refinancing, the student loan may be substantially reduced with lower interest rates.
There are numerous restrictions including the property can’t be a condo hotel, motel, houseboat, timeshare or segmented ownership, the loan-to-value ratio is no higher than 80% and the property was not listed for sale in the past six months. Other restrictions may apply as well. For borrowers wanting to buy a home, but thinking they had to wait until their student loan debt is paid, these new guidelines may help.
On the other side - borrowers who would swap their student loan for a mortgage loan would not be eligible to use income-driven repayment programs or seek Public Service loan forgiveness on federal student loans.
The student loan swap, sometimes called “reshuffling”, into a mortgage debt could jeopardize and put at risk a borrower’s home. If you fall behind paying a larger mortgage payment each month, your home can be foreclosed on and sold at auction. This is because the loan is a ‘secured debt’, meaning your home is collateral (the loan is supported by an asset).
The money from refinancing your mortgage loan to pay off the student debt may sound like a great idea, especially if you have equity in your home.
However, it’s always a good idea to make sure this swapping for a new loan or refinancing is what’s best in the long run and find out how it will affect your bottom line. There may be very real tax consequences you should discuss with a tax lawyer first, as you this reshuffling of debt could bring a large tax penalty.
Although a combined loan may have a lower interest rate, remember you will be paying that loan for an average of 30 years and most likely be paying more for your student loan over this extended period of time. Your student loan may be paid off in 8 to 10 years versus the 30 years paying a mortgage loan.
Before considering a ‘swap’, look at the hidden costs and fees and other risks that may be involved. It’s also a good idea to study all aspects and other options of federal repayment programs or student loan refinancing before signing a contract.
Before risking losing your home equity, it is best to speak with an attorney that is experienced in mortgages, real estate law, credit and tax law. Often, there are options available to reduce student loan debt to make the debt manageable, including reducing the debt and settlement options. These options should be discussed with an attorney before you sign a contract that could risk your home equity. Gantenbein Law Firm's attorneys are experienced in all these areas of law, and may be able to help. They are located in Denver, Colorado. For a consult, please call 303-618-2122.