Question by Jim: What is my best option for leveraging the equity in my home to finance my daughters college education?
Is it refinancing my 1st mortgage? Taking out a home equity line of credit? Taking out a home equity loan? Or none of the above?
Answer by Kaito the Grammar Nazi
How about letting your daughter pay for it herself? Colleges often have entire centers dedicated to putting students to work for money, and I think it gives them better appreciation for their classes if they’re paying for them.
Add your own answer in the comments!
Do not refinance your house for your daughter. Studies show if she is paying for it herself, she is more likely graduate, to VALUE her education, and then actually USE it when she graduates. As a dependent freshman she can borrow up to 5,500 a year in federal stafford loans. She doesn’t need a cosigner and she doesn’t have to pass a credit check. She can attend many many many many schools for well under this amount. She needs to choose one under this… My school only costs 3,000 a year. Then the extra 2,500 will be given to her for other costs like books and transportation expenses.
I like option “NONE of THE ABOVE”. if you WANT to help her, encourage her to find a cheaper school and then you pay outright for her 3000 a year for her first two years or so… that’s what my parents did.
This is a really tough question. With the current state of the economy, adding leverage to a home can be risky, leveraging an education can be risky, but not getting a competitive education can also be risky. Plus, college is very expensive relative to the income and jobs available once students graduate. Scholarships are clearly the best way to finance an education these days if at all possible.
I wouldn’t refinance your 1st mortgage unless you can get a better interest rate and free up more cash flow. Right now is a good time to reevaluate your first mortgage to see if you can save money given how low interest rates have gotten, but I’m not sure that it’s a good idea for financing an education.
A home equity line of credit (HELOC) could help you get a little money, but again, you don’t want to over-leverage your home in this environment. If you have good credit and can get a line at the prime rate (currently 3.25%), then a HELOC can be a relatively inexpensive source of cash. I wouldn’t take out more money than you can pay back over the next few years though (less than 5), as interest rates are expected to start going up sometime next year, and interest on HELOCs are variable. Just a few years ago they were as high as 8.5%.
As to whether to use a HELOC or a home equity loan, you might want to talk to the bank to see which might have a better rate or terms. HELOCs are general more flexible in that you can draw on them and pay them back sort of like a credit card. Home equity loans you can only repay once.