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Should You Consolidate Student Loans With a Mortgage?

Can I consolidate my student loans with a construction loan to build a new house?

My boyfriend and I are planning to build a new house in about a year. This fall we will seek out lenders and what we can afford. I have approximately $7,500 left in student loans. My payments are starting to increase because of the lower repayment plans I have been on. The payoff is in 2014, but the monthly payments will be very high. Is it possible to combine the student loans into our mortgage? There are two separate loans held by Sallie Mae. I never consolidated them because the interest is reasonable on both. If they cannot be combined into the mortgage, is it possible to just pay off the $7,500 with money from the mortgage since it is a smaller amount? I'm not sure how new construction mortgages work.

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Bill's Answer
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Graduate at Home. The right time to refinance?
Highlights

  • You may be able to use funds from a construction loan to pay off student debt.
  • Mortgage rules are tighter today than 5 years ago, and everyone is playing by the book.

Perhaps during the go-go days of the mortgage boom five to ten years ago such creative deals that would have allowed home buyers to trade student loan and other debt for a mortgage to buy a place to live, would have been possible. But, since the mortgage market meltdown, this kind of loan is history.

I think it highly unlikely that you will be able to structure the deal you suggested.  I would be very surprised if you could find a direct lender to write such a loan.

Construction Loans

However, I give you bonus points for thinking about a construction loan. There are two basic types of construction loans: construction-only loans and construction-to-permanent loans. The primary difference between these two types of loans is what will happen after your home is built. Construction-only loans are short-terms loans that are designed to pay for the construction of the home and which must be repaid after construction is completed.

The key benefit to using construction-only loans is that they provide borrowers with flexibility to finance their completed home with a wide variety of mortgage loan products, giving them freedom to shop around for the best mortgage interest rates and terms across the market.

Construction-to-permanent loans (CtoP) are where the loan, which starts as a construction loan, converts to a mortgage loan automatically after the home construction is complete. This type of loan is probably the more popular of the two common types of construction loans for two reasons.

First, they are convenient for borrowers, as borrowers do not need to worry about finding a mortgage loan to finance the property and pay back their separate construction loan. Building a home can be very stressful and the fewer issues that borrowers need to worry about the easier the process becomes. Borrowers also do not need to pay for two loan closings.

Second, CtoP loans are often encouraged by lenders due to the fact that this type of loan allows the same lender to keep control and retain the profits of both the construction loan and the post-construction mortgage. CtoP loans, therefore, are often more profitable for lenders than construction-only loans.

Here, the advantage of a construction loan is you may be able to use some of construction funds to retire the student loan debt. I write “may” because it is common for banks to review construction expenditures. If paying for non-construction expenses is contrary to your loan agreement the bank may stop funding the construction of your house if you try to slip through a payment to your student loan creditor.

Build vs. Buy

You may want to reconsider your idea of building a new residence at this time. Of course, every real estate market is local, but in many areas there is still a significant inventory of short sale and REO property available at prices per square foot that are below the cost of new construction.

Summary

Focus on retiring your student loan debt, and then building a fund you can use for a down-payment on a house. I do not expect home prices to rise anytime soon, so if you are feeling a sense of urgency to buy now because of the recent crash in home prices, consider where the prices of homes were 10 years ago to get a sense of how large the housing bubble expanded.

To read more about mortgage loans and the various programs available to borrowers, I encourage you to visit the Bills.com mortgage page. Go to the Bills.com mortgage saving center for no-cost, pre-screened quotes from mortgage lenders.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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