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How to Budget for a Mortgage with Student Loans

Key Takeaways

  • Refinancing student loans could free up extra cash for a down payment on a home.
  • Lower your debt-to-income ratio to show lenders you could afford to manage mortgage payments.
  • Consider using the money saved on refinancing student loans to make extra payments on your mortgage.

If you're planning to buy a house or budgeting for existing mortgage payments, you may be wondering how refinancing student loans could affect your debt management. When you choose to refinance, you're essentially trading in one or more federal and/or private student loans for a new loan with a new interest rate, payment amount, and repayment length. 

Here's how a refinance loan could help soon-to-be and current homeowners manage their finances to save for mortgage payments.

Lower your debt-to-income ratio

When you're applying for a loan, lenders analyze your debt-to-income ratio — the amount of income you have coming in compared to the total debt that you hold — to determine your risk as a borrower. A higher debt-to-income ratio tells lenders there isn't enough room in your budget to afford another debt, while a low ratio indicates you can afford an additional monthly payment. Refinancing your current student loans could help keep your debt-to-income ratio low before shopping for a mortgage. Here's more details on how to calculate debt-to-income ratio and an example of how it works:

DTI = MDP / GMI

  • DTI: Debt-to-income ratio is the variable you're solving for and stands for the ratio of your monthly debt to your monthly gross pay, written as a percentage.
  • MDP: MDP stands for "monthly debt payments" and represents the amount you spend on debt each month. For the sake of a loan application, only consider debts that are reported to a credit bureau such as credit cards, student loans, auto loans, and mortgages.
  • GMI: GMI denotes "gross monthly income" and should be replaced with income before any deductions or taxes are taken out. When you're deciding how to save money for a mortgage, keep in mind your net income (the amount you take home after deductions and taxes) could be considerably lower than your gross income.

Let's say you have four student loans. Each loan mandates a $200 payment each month ($800 per month), but you also have monthly credit card payments that total $100. Your monthly gross income is $2,000.

  1. Add your monthly debt obligations to calculate MDP. In this example, your monthly debt is $900.
  2. Replace GMI with your gross income: $2,000, in this example.
  3. Solve for DTI to find your debt to income ratio: DTI = 900 / 2000
  4. For this hypothetical, your debt-to-income ratio is: .45 or 45%

Typically, lenders do not disclose the maximum debt-to-income they will approve, but the 45% debt-to-income ratio is high considering most loan applicants with debt-to-income ratios over 43% are either not approved or incur high interest rates. Refinancing one or more of the student loans from the example above may substantially reduce your debt-to-income ratio and lower your monthly payments. You should take steps to lower your debt-to-income ratio as much as possible before applying to refinance or consolidate your student loans, since private lenders also prefer low ratios and good credit.

Free up additional funds

Refinancing student loans could make a big difference in your monthly budget. When you refinance multiple student loans, you combine several payments into one and potentially lower your total monthly payment. You can put the extra monthly cash toward your savings or debt reduction goals. Before refinancing, always compare the features and benefits of your existing loans with those of your new loan.

When planning your monthly expenses, you could use the money saved to make extra payments on your mortgage. Prepaying on a mortgage will reduce the length of time needed to pay it off and the amount of interest you'll pay overall.

You could also use the money saved to pay down your other debts. Paying down your credit card balances is an effective way to both lower your debt-to-income ratio and increase your credit score, both of which are beneficial when applying for a mortgage. If you don't have many debts, consider allocating the extra money to an interest-bearing account that can someday be used for the down payment on your home.

More information

We are committed to helping you reach your potential. To learn more about how refinancing your student loans could help you reach your saving goals, check out our refinance calculator, call 1-877-405-2262 to speak with one of our Student Lending Specialists, or visit your nearest Citizens Bank branch.

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