Should You Refinance Your Student Loans Before Getting a Mortgage?

It's no secret that student loans can be a roadblock to buying your first home. Blogs and news outlets (including this one) have written about it at length. That's partly because more than 75 percent of first-time buyers say that having student loan debt has impacted their ability to buy a home. It's such a barrier that most people are only able to put down 5 percent for their down payment. 

So when it comes to saving for a home while you're paying your loans, does refinancing your student loans make sense?

How can refinancing help you afford a mortgage?

When you're looking at around $29,000 in student loan debt the difference between paying at 6 percent interest and 4 percent interest is $5,800 over the life of your loan. If you're buying a $150,000 home, that's already 3.8 percent of your downpayment! 

Refinancing any loan should accomplish one of two things. It either lowers your monthly payment or it shortens the term of your loan so you end up paying it off faster. The first goal will help you free up some money each month to put toward a mortgage or down payment and the second will help you pay off your student loan faster so you can focus all your financial energy on your mortgage. 

Remember, if you choose to lower your monthly payment, you could be increasing both the amount of time you have left on your loan and the total amount you pay on the loan. That's because the longer you're paying a loan, the more you end up paying in interest. So, while it may help you achieve your dream of owning a home, you should also think hard about whether or not if fits into your overall financial plan. 

How to refinance a student loan

There are plenty of online banks that specialize in student loan refinancing and even entire websites dedicated to helping you find the best solution for your situation. You can also check with your current lender and see if you qualify. 

Refinancing a student loan is a lot less involved than getting or refinancing a mortgage. In general, a lender will just need to know

  • Name
  • Address
  • University and degree
  • Amount of debt you want to refinance
  • Your current income
  • How much you pay in housing costs each month 

Will this affect my credit?

Credit reporting agencies want to see you making smart financial decisions and in this case, that means shopping around for the best rates. FICO gives potential borrowers a 30-day window to explore multiple lenders to find the best rate for your refinance. The same is true when you're ready to apply for your mortgage, so remember to take advantage when the time comes!

If you're in the process of getting approved for a mortgage you should put your refinance on hold until your mortgage goes through. Remember, when you refinance you're essentially taking on an entirely different loan. And whenever you take on a new debt, your mortgage lender is going to have to start the process all over again. 

What about student loan forgiveness?

When people are planning on student loan forgiveness, they're most commonly planning on using the Public Student Loan Forgiveness program. That's because this program isn't tied to any sort of income or hardship event, instead it's goal is to support and encourage people who choose a career in public service. That includes jobs like police officers, teachers, non-profit workers. 

To qualify, you need to have at least 10 years experience working in:

  • Government organization (government contractors are excluded) 
  • 501(c)(3) exempt nonprofit (religious-based nonprofits are excluded)
  • Full-time AmeriCorps or Peace Corps

Your loan has to:

  • Be a federal loan including
    • Direct subsidized and unsubsidized
    • Direct PLUS loans
    • Direct Consolidation loans 
  • You have made 120 on-time payments 

Finding Mortgage Loan Programs for First-Time Buyers

Saving for that downpayment can still seem pretty impossible when you're looking at 20 percent of a home. Fortunately, there are a lot of first-time home buyer programs that allow you to buy a home with a low down payment. Even some cities have similar first-time home buyer programs to encourage younger people to buy property in the city. 

If you do qualify for student loan forgiveness, you might also qualify for first-time buyer programs that help public servants like teachers, police officers, and EMTs.

Student loan debt definitely makes buying a home more difficult, but not impossible. Remember to look at all your options and figure out what's right for you. 

Want more help buying your first home? Check out our first-time home buyer education center. 

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