BLOG VIEW: An estimated 8.5 million U.S. households with student debt (their own or co-signed student loans) could potentially pay down or completely pay off their student debt obligations using the equity from their homes. With the Student Loan Payoff ReFi offered by San Francisco-based SoFi, borrowers will be able to seamlessly pay down their student loans, while taking advantage of today’s low mortgage interest rates.
SoFi worked closely with Fannie Mae to develop the innovative refinance program as a way to help mitigate the student debt burden that plagues many borrowers.
Jonathan M. Lawless, vice president of single-family analytics and affordable housing at Fannie Mae, says research shows that borrowers who use home equity to pay down student debt perform well on their mortgages. This, in turn, gives Fannie Mae comfort to reduce the guarantee fee for these cash-out refi loans.
During an interview with MortgageOrb, Lawless explains how this groundbreaking cash-out refinance program aimed at cutting student debt works.
Q: How does SoFi’s cash-out refinance program work? What kind of loan-to-value (LTV) mortgages are eligible? Is this offering only for primary residences?
Lawless: This program allows borrowers to refinance their loans and increase their loan amounts to use the additional cash to retire student debt, which typically carries a higher interest rate. This will allow borrowers to increase their balances up to 80% LTV, to keep people from taking on more debt than they can handle, and requires that the property be their primary residence. The mortgage being refinanced does not need to be an existing Fannie loan. The loan – as long as it meets our standards – will become a Fannie loan once it is refinanced.
Q: Cash-out refinancings often are at higher cost to the borrower – with some exceptions. Does the SoFi cash-out refinance offering fall into the category of any of those exceptions?
Lawless: Because these loans will be treated as a limited cash-out refinance, there is no additional loan-level price adjustment for taking cash out.
Q: Why would Fannie Mae agree to make the exception to the guaranty fee? Are these borrowers viewed as better credits than others because they use the home equity to pay down student debt?
Lawless: Borrowers have used equity to pay for many things historically, including paying down student debts. We have found in our research that borrowers who extinguish student debt with equity perform extremely well. This gave us comfort reducing the guarantee cost for these loans.
Q: By some estimates, about $1.4 trillion of student debt is outstanding. How many homeowners could benefit from the cash-out refinance program?
Lawless: SoFi estimates that 8.5 million Americans with or co-signed on student debt also own a home. A large share of those homeowners is likely to have equity to use to pay down student debts.
Q: Is this SoFi program for everyone? Are there protections offered to borrowers with student debt that are not available to homeowners?
Lawless: Lowering your interest rate on your debt is always a good thing, but consumers should be mindful of two things before choosing this program. First, federally insured student debt does include certain protections, such as the ability to adjust your payment if you experience a decrease in income. A mortgage doesn’t have these types of features.
Second, most mortgages are 30-year term, while most student loans are 20-years or shorter. A longer term means one can spread one’s payment over a longer period of time – which will reduce the monthly cost. But, over the 30-year period, one will probably pay more interest.
Consumers can always choose a shorter-term mortgage or pay more than the small, required amount on a 30-year, so they experience the full benefits of the rate reduction without incurring more costs over the lifetime. Conversely, some may prefer paying for a longer period of time to lower their monthly costs.
Q: How did SoFi and Fannie Mae come together to create this novel cash-out refi program for student debt?
Lawless: Fannie Mae has been working on a variety of programs to address the significant burden that student debts have put on achieving homeownership. When we started thinking about how to leverage the close to $8 trillion of home equity today to lessen some of the $1.4 trillion of student debt, we approached SoFi, a new customer of ours, to learn about student debt and refinancing. Through those discussions, we developed this program.
Q: Many homeowners may not be aware that they can take equity out of their homes to pay down student debt. Do you have any data suggesting how many homeowners have used cash-out refis to pay down school debt? Does the increase in home values in many markets in recent years make this program more widely available for homeowners?
Lawless: From what we can see in the data, when a borrower does a cash-out refinance, about 1.8% of the time, they are applying the cash toward pay down of student debt. We think many more consumers don’t do this today because they’re not aware. When we have looked at this population historically, we have seen that they perform very well on the mortgages afterward. This is the reason we’ve gotten comfortable waiving the extra fees associated with taking cash out of a property.
The key to being able to do this program is having equity in your home. Recent home price appreciation, significant in many markets, will make more borrowers eligible for the program.
Q: Will this cash-out refinance program be made available by other lenders?
Lawless: Our intention is to make this program available to all lenders, depending on the level of consumer interest and final approvals from our regulator. Our hope is that this will be made widely available early next year.
Q: Will these cash-out refinance loans be resold into mortgage-backed securities (MBS)?
Lawless: The resulting loan after the refinance will be eligible for sale to Fannie Mae and will most likely end up in a standard MBS.