Should I combine my mortgage and student loans?


If you’re a homeowner and still paying off student loans, it might be tempting to simultaneously consolidate your debt and take advantage of low interest rates by refinancing your mortgage, taking out cash and and using that to pay off your education debt.

But while this strategy may seem like a good idea on the surface, it probably isn’t a great option for most people.

“If you’re looking at consolidating your debts to free up cash flow, this is not the right idea,” says Ashley Dixon, lead planner at Gen Y Planning, an online financial planning service.

She and other experts said there are potential pitfalls to putting your student and home debt into one bucket, and that there are other, more effective ways of reducing your payment burden.

Here’s a look at some of the downsides and alternatives to this strategy.

You’ll lose student loan-specific protections

Many student loans — especially those issued by federally backed programs — have special conditions meant to help the borrower.

These range from repayment options based on your income to the possibility of forgiveness if you go into government or nonprofit work after graduating. Some other professionals, like teachers, doctors and nurses also qualify for certain types of loan forgiveness.

If you refinance your student loans into your mortgage, those protections go away.

“The big downside of refinancing federal student loans is that you’ll have to do so with a private lender,” says Chelsea Wing, loans editor at Bankrate. “This means sacrificing many of the benefits of federal loans, including income-based repayment plans, the potential for student loan forgiveness and deferment options like we’re seeing now — through the end of 2020, federal borrowers aren’t accruing interest, and they’re not required to make their student loan payments. Many private lenders have their own deferment and forbearance options, but not at this scale.”

That forbearance program is especially important to keep in mind if you’re considering refinancing your student loans. If you refinance that debt into your mortgage and close before the end of the year, you’ll need to start paying that debt again immediately and will also start accruing interest again away.

You’re more at risk of losing your house

“I’m always suggesting to people that they keep the debt with the thing that the debt bought,” says Jennifer Lane, owner of Compass Planning Associates in Boston, Massachusetts. “The student loan buys the education, the car loan buys the car.”

Wrapping different kinds of debts together can create unintended consequences if you one day struggle to make your payments.

“If you can’t pay your student loan, they kill your credit, but you still have a place to live,” Lane says. But if you roll your student loans into your mortgage, that means you’re putting your house up as collateral against the debt. If you can’t make the payment, the bank might foreclose and you could lose your home.

It could be more expensive overall

It’s true that mortgage interest rates are near historic lows right now, but low rates aren’t the only thing to consider when you’re calculating the true expense of your student loans.

“You want to look at an amortization calculator because you may pay more for that student loan over time if you stretch it out for a longer period,” says Katie Bossler, quality assurance team lead and a certified credit counselor at GreenPath Financial Wellness, a financial planning firm headquartered in Farmington Hills, Michigan. “It may not be as simple as it appears, swapping rates. That term matters.”

Typically, student loans are paid off over 10 years, while the most common mortgage term is 30 years. That means, even if you get a lower rate on your mortgage than you currently have on your student loans, you may pay more in interest because you might be carrying some of the debt for an extra two decades.

What are the alternatives?

Low interest rates aren’t limited to mortgages right now, so your first step should be seeing if you can refinance your student debt separately.

“You can compare rates on student loan refinance options,” Bossler says, adding that you may be able to find student loan refinancing options with interest rates comparable to a mortgage right now, while maintaining a shorter repayment period.

Dixon agrees. “We’d look at just refinancing their student loans. I was looking at the rates and the rates on student loans are close to 3 percent as well.”

Keep in mind though that if you turn federal loans into private ones, you do lose many of the protections and payment plan possibilities outlined above.

Also, it’s important to keep your goals in mind. If your primary aim is to lower your monthly payments, you may be able to achieve that just by speaking to your loan servicer.

“They may have a lot of options available to lower that monthly payment,” Bossler says. Even privately financed student loan providers may offer some repayment flexibility.

Bottom line

It is possible to refinance your mortgage to wrap in your student loans. It’s a strategy that will help you consolidate your debt and it means you’ll have one less monthly bill to worry about. But there are many risks involved, and it may be more expensive overall.

The advisers agreed that it’s important to keep your larger financial goals in mind if you’re considering refinancing your debt.

“Really, when you’re thinking about refinancing, what’s helpful rather than just looking at the new interest rates is adding up the lifetime of new payments,” Lane says. “Unless I was going to refinance the mortgage anyways, I wouldn’t take a low rate mortgage just to get the student loans in there because of all the negatives and the extra cost.”

And even if you are planning a mortgage refinance, it probably makes more sense to keep your student loans separate.

“Overall, there’s just a lot of reasons why this may not be a great idea,” Bossler says. “Take it on with a lot of caution.”

Learn more:
These are the best (and worst) reasons to refinance your mortgage
The ultimate guide to federal student loans
What to do with your private student loans during the coronavirus crisis

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