Giving your kids a start with a home equity loan

Your child got into the college of her dreams, complete with a great dorm room. But how is her college education experience treating you? The cost of sending a child to school can be an overwhelming burden to the parents’ finances. If you’re a homeowner, dipping into the equity you amassed in your home while your kids were growing up might be the ticket for covering the high cost of education. Or maybe you’d just like to give your adult kids a leg-up, with a down-payment check for their first home.

What is a home equity loan?

Equity is the difference between your home’s appraised -- or fair market -- value and your outstanding mortgage balance (if any). A home equity loan allows you to borrow up to 80 percent of the value of your home, less existing mortgages.

Why it’s worth considering

There are many reasons using home equity loans make sense to help your child move on to the next stage of his or her life. For one, they’re often a more attractive option than selling investments. Going that route sacrifices any future return on your investments and could result in a hefty capital gains tax bill.

Home equity financing also makes more sense than cashing in your retirement funds. You may be charged a higher rate of interest to borrow against your retirement and also may be required to pay a penalty. And don’t forget the income tax you’ll have to pay on the withdrawals.

Since home equity loans or lines of credit are secured against the value of your home, they usually have lower interest rates than unsecured loans.

In addition, the interest you do pay may be tax-deductible (up to $100,000), though you should consult a tax advisor about your situation.

Mortgage rates are still low enough that taking on more house debt is not as onerous as it once was. On average, house values have climbed consistently over the past several years, indicating a reasonable expected return.

Tread carefully

Take care to have thought out your decision thoroughly before venturing into this territory. As accessible and attractive as this ready source of funds seems, there’s still risk involved. If you’ve reached the life stage where you’re considering giving your kids a financial boost, you’ve also reached the one where the necessity of retirement planning starts to loom. By putting more debt on your paid-off or soon-to-be-paid-off home, you risk sabotaging your own retirement nest egg.



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