As Americans accumulate debt, they're also looking for ways to manage it. From balance-transfer credit cards to loan modifications, there are options for people who want to pay off or consolidate what they owe. Rolling student loan debt into your mortgage is one of those options.
The two types of debt most Americans carry are mortgages and student loans. This year, student loan debt climbed to $1.5 trillion, the second-largest consumer debt category after mortgages, at a staggering $9 trillion, according to the Federal Reserve.
Last year, Fannie Mae, which buys and packages most of the mortgages in the U.S. and sells them to investors, added an option for mortgage borrowers with student loans: Student loan cash-out refinance. Borrowers who opt for this pay off their student debt by refinancing their mortgage.
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Fannie Mae will waive the loan-level price adjustment that normally applies to these transactions. The cost of price adjustments depends on the borrower's risk factors, such as credit score and debt-to-income ratio. Some people could pay 1 percent of the loan to get the arrangement.
Paying one loan with another loan is also referred to as debt reshuffling. Although it might feel good to have one less bill to pay, debt reshuffling is not magic. You still owe the money–you've just changed the terms and possibly forfeited protections you might need later, but we'll get to that in a moment.
"The reality is that with consolidation it feels like you're making progress," says Chris Hogan, financial coach and author of Everyday Millionaires. "You're taking this big chunk of student loan debt and getting rid of it."
Really, though, you are attaching that debt to your home in place of equity. It's a move that requires careful consideration.
"The goal of the home is for you to own it," says Hogan. "What you're doing is taking the equity out of your home immediately by the size of the student loan debt."