“How will we pay for college?” It’s a question that’s on every parent’s mind as their child approaches the end of high school.
There are federal student loans, Parent PLUS loans, and private loans available. But what about borrowing the value in your home? Using home equity to pay for college can help you pay for college while saving money on interest.
Understanding Home Equity Loans
Briefly, home equity is the portion of your home’s value that you have already paid off. Sometimes you gain equity through faithfully making your mortgage payments for many years. Other times, market conditions can cause the value of your home to increase, giving you additional equity without any effort.
A home equity loan allows you to access the value of your home. A lender will give you a portion of your equity in cash, and your home will be collateral. Because you have a strong asset to begin with, it’s often easy to qualify for a home equity loan for college education. Interest rates may also be lower than other college borrowing options.
Types of Home Equity Borrowing
There are two primary ways to access your home equity for college tuition. The first is a lump-sum home equity loan. You get the money all at once, and you repay it over a specific period of time. You can often get a fixed interest rate with these types of loans as well.
On the other hand, you may decide to have a Home Equity Line of Credit (HELOC.) This line of credit behaves similarly to a credit card. You can access the money when you need it, and as you pay it back it becomes available again.
A HELOC will have a specific draw period of several years, and then will enter a repayment period. During the repayment period, you’ll make larger payments on the debt and won’t be able to draw on it any further. A HELOC usually has a variable interest rate.
Questions to Ask Before Using Home Equity to Pay for College
Before you decide to use your home as an option to pay for school, it’s important to ask yourself some key questions.
How Will This Affect Retirement?
A home equity loan can have a 10 – 20-year repayment term. A HELOC will often take 20 years to repay fully. If you refinance your home entirely, you may end up with another 30-year mortgage.
Depending on your age and financial situation, owing money for that many years can impact your retirement plans. Don’t put your long-term future at risk if you can avoid it.
Have You Maximized Other Low-Cost Funding Options?
Subsidized student loans and other sources of college funding should be used before private loans or home equity. Most students can get a low-interest, fixed interest school loans with low fees.
If these loans aren’t repaid, your credit rating will take a hit. But if a home equity loan isn’t repaid, you could lose your house, which would be much more serious.
How Much Money Do You Need?
With a home equity loan, you need to determine the full amount of the loan up front. You probably won’t be able to set up new loans each year your student is in college.
With a HELOC, you have a lot more flexibility, but the variable interest rate means you could end up having high payments during the repayment period. Unfortunately, it’s impossible to know where interest rates will be in 10 – 15 years.
Have You Planned Ahead?
It’s important to start thinking about a home equity loan or HELOC before you actually need it. If the loans is part of a long-term financial plan and you’ve thought through how it will impact your finances, taxes, and retirement, that’s great.
On the other hand, if you’re panicking and think borrowing against your home is your only choice, it might be best to take a step back and look at all of your college funding options.
Should You Use Home Equity for College Tuition?
There are a variety of pros and cons to every college funding option, including using home equity to pay for college.
Before you look at debt, make sure you’ve covered your bases in other ways:
- Has your student chosen an affordable school?
- Has your child applied for all available scholarships?
- Have low-cost federal loan options been maximized?
- Have you taken into account student work options, family gifts, and other sources of funding?
If you need help understanding your college funding options, we’re here for you. We love doing research, whether it’s on student lenders, options for tapping home equity, analyzing when to use parent plus loans, discovering schools more generous with aid, searching for scholarships your child can apply for, and more.
For more information on finding more generous colleges, check out our college merit scholarship toolkit today!
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