A new refinance mortgage offered by Social Finance, better known as SoFi, lets consumers tap into their home equity to pay down student loan debt at terms more favorable than a traditional cash-out refi.
The San Francisco-based online lender is partnering with Fannie Mae on the product. The loans will be underwritten to the secondary market investor's guidelines for credit score, debt-to-income ratio and other criteria, and the property must support an 80% loan-to-value ratio, inclusive of both the original mortgage and student loan debts.
The "Student Loan Payoff ReFi" can be used to either reduce or completely pay off the borrower's existing student loans and is available to both consumers with their own outstanding student loans and those who have co-signed loans. About 8.5 million of the more than 44 million U.S. consumers with student loan debt are homeowners with sufficient equity and creditworthiness to qualify for the loan, SoFi estimates.
SoFi and Fannie Mae are working exclusively on the offering. Depending on the results of the pilot program, Fannie Mae will evaluate whether to offer more widespread student loan payoff products in the future, said Jonathan Lawless, Fannie Mae vice president of product development and affordable housing.
SoFi's product is priced competitively with a rate-and-term refinance, which typically has an interest rate that's 25 basis points lower than a traditional cash-out refi. SoFi can offer the more favorable terms because it disburses the student loan portion of the mortgage directly to the student loan servicer. That helps reduce the risk of default compared to other cash-out refi and home equity loans that can be used for any purpose, said Michael Tannenbaum, SoFi's senior vice president of mortgage.
"When you think about how high student loan interest rates can be relative to mortgage, it's amazing to think about how many homeowners can use this new product to benefit from their home equity and pay off their student loans," Tannenbaum said in an interview.
Approximately 90% of private student loans require a co-signer, according to Sallie Mae data cited by SoFi. The average homeowner with co-signed student loans has a balance of $36,000 on those loans, while homeowners with outstanding Parent PLUS loans have an average of $33,000 of student loan debt, according to Experian data cited by SoFi.
SoFi became an approved Fannie Mae seller/servicer earlier this year. It will fund the student loan mortgages from its balance sheet, as it does for its entire mortgage production, and service the loans.
Nearly 75% of SoFi's mortgage volume is purchase loans and 65% of that is for first-time homebuyers. In the future, SoFi's student loan refinance mortgage could serve as a model for a purchase mortgage product for borrowers whose high student loan debt is keeping them from buying a house ,Tannenbaum said.