Should You Use a Mortgage to Refinance Student Loans?

Fannie Mae, the largest backer of mortgage credit in America, recently made it a little easier for homeowners to refinance their student loans. In an update to its Selling Guide, the mortgage giant introduced a student loan cash-out refinance feature, permitting originators that sell loans to Fannie Mae to offer a new refinance option for paying off one or more student loans.

That means you could potentially use a mortgage refi to consolidate your student loan debt. Student loan mortgage refis are relatively new. Fannie Mae and SoFi, an alternative lender that offers both student loans and mortgages, announced a pilot program for cash-out refinancing of student loans in November 2016. This new program is an expansion of that option, which was previously available only to SoFi customers.

Amy Jurek, a Realtor at RE/MAX Advantage Plus in Minneapolis/St. Paul, Minn., says people with home equity have always had a cash-out option, but it typically came with extra fees and higher interest rates. Jurek says the new program eliminates the extra fees and allows borrowers to refinance at lower mortgage interest rates. The policy change could allow homeowners to save a significant amount of money because interest rates on mortgages are typically much lower than those for student loans, especially private student loans and PLUS loans.

But is it a good idea?

Your student debt isn’t eliminated; it’s added to your mortgage loan.

This may be stating the obvious, but swapping mortgage debt for student loan debt doesn’t reduce your debt; it just trades one form of debt (student loan) for another (mortgage).

Brian Benham, president of Benham Advisory Group in Indianapolis, Ind., says refinancing student loans with a mortgage could be more appealing to borrowers with private student loans rather than federal student loans.

Although mortgage rates are on the rise, they are still at near-historic lows, hovering around 4%. Federal student loans are near the same levels. But private student loans can range anywhere from 3.9% up to near 13%. “If you’re at the upper end of the spectrum, refinancing may help you lower your rate and your monthly payments,” Benham says.

So, the first thing anyone considering using a mortgage to refinance student loans should consider is whether you will, in fact, get a lower interest rate. Even with a lower rate, it’s wise to consider whether you’ll save money over the long term. You may pay a lower rate but over a longer term. The standard student loan repayment plan is 10 years, and most mortgages are 30-year loans. Refinancing could save you money today, but result in more interest paid over time, so keep the big picture in mind.

You need to actually have equity in your home.

To be eligible for the cash-out refinance option, you must have a loan-to-value ratio of no more than 80%, and the cash-out must entirely pay off one or more of your student loans. That means you’ve got to have enough equity in your home to cover your entire student loan balance and still leave 20% of your home’s value that isn’t being borrowed against. That can be tough for newer homeowners who haven’t owned the home long enough to build up substantial equity.

To illustrate, say your home is valued at $100,000, your current mortgage balance is $60,000, and you have one student loan with a balance of $20,000. When you refinance your existing mortgage and student loan, the new loan amount would be $80,000. That scenario meets the 80% loan-to-value ratio, but if your existing mortgage or student loan balances were higher, you would not be eligible.

You’ll lose certain options.

Depending on the type of student loan you have, you could end up losing valuable benefits if you refinance student loans with a mortgage.

Income-driven repayment options

Federal student loan borrowers may be eligible for income-driven repayment plans that can help keep loan payments affordable with payment caps based on income and family size. Income-based repayment plans also forgive remaining debt, if any, after 25 years of qualifying payments. These programs can help borrowers avoid default – and preserve their credit – during periods of unemployment or other financial hardships.

Student loan forgiveness

In certain situations, employees in public service jobs can have their student loans forgiven. A percentage of the student loan is forgiven or discharged for each year of service completed, depending on the type of work performed. Private student loans don’t offer forgiveness, but if you have federal student loans and work as a teacher or in public service, including a military, nonprofit, or government job, you may be eligible for a variety of government programs that are not available when your student loan has been refinanced with a mortgage.

Economic hardship deferments and forbearances

Some federal student loan borrowers may be eligible for deferment or forbearance, allowing them to temporarily stop making student loan payments or temporarily reduce the amount they must pay. These programs can help avoid loan default in the event of job loss or other financial hardships and during service in the Peace Corps or military.

Borrowers may also be eligible for deferment if they decide to go back to school. Enrollment in a college or career school could qualify a student loan for deferment. Some mortgage lenders have loss mitigation programs to assist you if you experience a temporary reduction in income or other financial hardship, but eligibility varies by lender and is typically not available for homeowners returning to school.

You could lose out on tax benefits.

Traditional wisdom favors mortgage debt over other kinds of debt because mortgage debt is tax deductible. But to take advantage of that mortgage interest deduction on your taxes, you must itemize. In today’s low-interest rate environment, most taxpayers receive greater benefits from the standard deduction. As a reminder, taxpayers can choose to itemize deductions or take the standard deduction. According to the Tax Foundation, 68.5% of households choose to take the standard deduction, which means they receive no tax benefit from paying mortgage interest.

On the other hand, the student loan interest deduction allows taxpayers to deduct up to $2,500 in interest on federal and private student loans. Because it’s an “above-the-line” deduction, you can claim it even if you don’t itemize. It also reduces your Adjusted Gross Income (AGI), which could expand the availability of other tax benefits.

You could lose your home.

Unlike student debt, a mortgage is secured by collateral: your home. If you default on the mortgage, your lender ultimately has the right to foreclose on your home. Defaulting on student loans may ruin your credit, but at least you won’t lose the roof over your head.

Refinancing student loans with a mortgage could be an attractive option for homeowners with a stable career and secure income, but anyone with financial concerns should be careful about putting their home at risk. “Your home is a valuable asset,” Benham says, “so be sure to factor that in before cashing it out.” Cashing out your home equity puts you at risk of carrying a mortgage into retirement. If you do take this option, set up a plan and a budget so you can pay off your mortgage before you retire.

The post Should You Use a Mortgage to Refinance Student Loans? appeared first on MagnifyMoney.

How to Speed Up Your Mortgage Refinance

Clock time deadline

When you’re refinancing your mortgage, timing is everything.

Once a lender offers you a rate, they only give you a certain amount of time in which to take advantage of it — a period called a “lock.” Locks come in 15-day increments. The shortest is 15 days, followed by 30 days, followed by 45 days, and so on. Shorter locks generally mean better rates, while longer locks mean higher rates.

If you’ve found an amazing interest rate with a short lock period, you’ll want to make sure things go as quickly and smoothly as possible so you don’t lose that fantastic deal. Here are the best ways to speed up the mortgage refinance process so you can take advantage of lower interest rates.

Related Article: Guide to Refinancing Your Mortgage

Be Honest on Your Application

You may be tempted to omit some debt on your application in order to get approved for a larger loan. Don’t do it. Lenders will find out if you’re withholding information about debts, and the ensuing paperwork will slow down the process. Avoid the headache now and be forthright about all of your finances.

You do not, however, need to disclose all of your assets. In fact, Casey Fleming, mortgage adviser and author of The Loan Guide: How to Get the Best Possible Mortgage, cautions against it if you want the process to go quickly.  

“Typically, [you only need to disclose] enough to pay for all closing costs, plus a little more than three months of reserves,” Fleming advises. One month of reserves is the sum of the principal, interest, taxes, insurance, mortgage insurance, and any HOA dues you may incur with your new property.

“Providing more assets than this just gives the underwriters more paperwork to plow through and more opportunities for more questions,” Fleming says. “It is not considered fraudulent to understate your assets.”

Know How to Access Your Paperwork and Return Documents Quickly

Because each individual’s situation is different, it’s very hard for borrowers to know what paperwork they will need to include in their application before applying. Fleming does, however, recommend knowing how to get necessary paperwork should it be requested. This includes knowing how to print out e-statements from financial accounts and obtaining copies of pay stubs and deposited checks.

Throughout the process, you will be asked to submit additional supporting documentation, along with signing and returning new documents issued by the financial institution. This is one of the biggest things that slows down mortgage refinances, and it’s completely in your hands. Return all requested paperwork expediently.

Stay at Your Current Job

If you’re thinking of making a career move, hold off until you close. Stability is a big deal when lenders are making their decisions, and switching employers before closing could negate the entire deal.

Don’t Take on New Debt

If you’re looking for a fast refinance, it is wise to stop taking on new debts 60 days before you apply. It can take this long for lenders to report new loans to the credit bureaus. If your new loan doesn’t appear on your credit report, the financial institution issuing the mortgage refinance will have to get in touch with the credit bureaus directly, which costs both additional time and money.

Note: Taking on new debt, even prior to 60 days before your application, can temporarily reduce your credit score. This can affect the interest rates you are offered or even keep you from qualifying.

You may think you’re golden after you have been approved, but that simply isn’t true. Your lender will pull your credit report on the day of closing, enabling them to see any new debt you’ve taken on since they approved your application. Don’t do anything that would change your debt-to-income ratio.

Find a Lender Who Uses Appraisal Waivers

In the past, common industry advice instructed borrowers to schedule their appraisal as soon as possible, and to keep their own schedule flexible so they could accommodate that of the appraiser. Because physical property appraisals take a long time, this was one of the best things you could do to speed up the process.

However, technology is now offering better and quicker options both for the lender and the borrower.

“More and more automated approvals are requiring only an automated valuation — a software-generated estimate of value,” says Fleming. These valuations are similar to Zillow Zestimates, but they are more accurate as they are based on more data points. “This is commonly known as an appraisal waiver. It is faster and, of course, cheaper than a real appraisal.”

Fleming says that the cost of a typical home appraisal would likely run somewhere between $400 and $500, though he notes these numbers can vary depending on region.

“Appraisal waivers used to be $75,” says Fleming, “but I understand that Fannie [Mae] is experimenting with waiving the appraisal waiver fee.” That means that the appraisal waiver is potentially free to your financial institution.

Not all lenders use appraisal waivers equally. Before applying, you can ask different lenders what percentage of their loans were approved with appraisal waivers in the past 12 months. This can help you identify lenders who will save you a lot of time during the appraisal process.

If you can’t find a lender with competitive rates who also uses appraisal waivers, stick to the old advice and book your appraisal as early as possible.

Refinances Will Move Faster This Year

If you applied for a mortgage refinance in 2016, you probably noticed that the process took a long time. There was a reason for that.

“Interest rates stayed much lower than expected,” Fleming explains. “The purchase market is not highly sensitive to interest rates, but the refi market is. Purchase applications were about as predicted [in 2016], but the refi market was much larger than anticipated.”

Because interest rates stayed so low, more people applied for mortgage refinances. Financial institutions weren’t expecting the increased demand, so many found themselves severely understaffed.

In 2017, Fleming doesn’t predict the same problem. In fact, he anticipates that mortgage refinances will close much more quickly.

“With rates up about 0.5% or more from the lows of last year, it is estimated that 25% to 50% of the refi market is no longer viable,” says Fleming. “It no longer makes sense for [many homeowners] to refinance. So, in 2017 the purchase market will stay about steady, while the refi market will drop precipitously.”

That means staffing should not be an issue and lenders will be eager for your business. The entire process is anticipated to move very quickly in the new year, which is good news for those securing competitive interest rates with short lock periods.

The post How to Speed Up Your Mortgage Refinance appeared first on MagnifyMoney.

How Often Can I Refinance My Mortgage?

couple_refinance

Though it may come as a surprise, there is no limitation to how frequently you can refinance your home. You can refinance as often and freely as you like so long as it financially makes sense to do so. Here are some things to consider before you move to refinance your mortgage.

1. What Are the Closing Costs?

Are you throwing good money after bad? If you recently paid fees on your last mortgage, you may lose out by refinancing again just a short time later. A big payment reduction or a lender credit refi-scenario, however, can help make things worthwhile.

2. Will There Be an Early Payoff Fee?

An early payoff (EPO) fee is not to be confused with a prepayment penalty. A prepayment penalty prohibits you from prepaying any of your principal without incurring a penalty before the specified timeframe is up. An early payoff fee is paid to the originating mortgage company on a loan that only lasts on the books for just a few short months. An early payoff fee can generally be charged if the loan is only up to six months old, but can be imposed in timeframes as short as three months. You may be able to work with the original lender, however, to avoid being charged as they can typically absorb any early payoff fee.

Mortgage Pro Tip: Mortgage companies know financial circumstances change as does a homeowner’s need to borrow money. If your financial circumstances have changed, it is your right as a homeowner to refinance your house.

3. Will You Need Impound Account Monies?

Impound accounts are set up by your lenders to pay off expenses like property taxes and homeowner’s insurance. For instance, if you are refinancing your home from Feb. 1 through April 10 or from Oct. 1 through Dec. 10, first installment property taxes will be included on your loan estimate at the closing table. Let’s say, for example, you bought your home in June. That same year interest rates dropped and you decide to refinance your house just few months later. Your closing is slated for Nov. 1. As a result, your escrow company is going to collect first installment property taxes even though they are not due until Dec. 10. Title/escrow companies are required to collect for the first installment and second installment of property taxes when refinancing in those calendar months. The previous loan transaction you may have completed earlier in the year may not have collected for a tax installment as it may not have been due at the time.

4. Will Your Closing Process Be Different?

Was your last mortgage transaction before Oct. 1, 2015? If it was, plan for a different mortgage loan closing process. The Consumer Financial Protection Bureau’s most recent change to the closing process now requires a borrower to be more involved. The closing process, for instance, now requires borrowers to e-consent to various consumer and financial disclosures. Additionally, a closing disclosure is now sent by the lender three days before your final settlement, which also must be acknowledged and executed online. While these changes are meant to make it easier for a borrower, some consumers might find the process of consenting to online disclosures a little irksome. However, it’s the new way mortgage loans are originated.

Here are some other factors to evaluate.

  • The housing market. Your home may have appreciated in value from the last mortgage transaction, potentially moving you into a different loan-to-value parameter and subsequently creating a financial opportunity.
  • Loan purpose. If you previously did a cash-out refinance in excess of $417,000, you might benefit by refinancing again into a rate and term refinance. On loan sizes greater than $417,000, there is a substantial pricing difference from a cash-out refinance loan-to-value requirement versus a rate and term refinance loan-to-value requirement.
  • Rates. Even as little as a 0.25% reduction in your interest rate can make a difference — If you can negotiate with the lender to pay your closing costs, you’re likely benefiting. It helps, too, to have a good credit score, since they generally entitle you to better terms and conditions on a mortgage. You can see where you stand before you refinance by pulling your credit reports for free at AnnualCreditReport.com and viewing your credit scores for free on Credit.com.

The decision to refinance depends on your circumstances — and your ability to make a sound choice when evaluating them. Furthermore, it can help to stay in regular communication with your preferred lender. Checking in every six months can be worth the effort, as interest rates are always in flux and underwriting is slowly beginning to loosen.

More on Mortgages & Homebuying:

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