Can I Use a Home Equity Loan to Pay for College?
Going to college is a major life milestone in many people’s lives, but it’s also an expensive undertaking for most. With tuition costs on the rise, some families may consider using a home equity loan to pay for college. This loan type allows you to borrow against the equity you’ve built in your home and repay it over time.
- Home equity loans provide flexibility, allowing you to borrow from a lump sum as college expenses arise.
- You use your home as collateral with a home equity loan, which means you could lose it if you default on your monthly payments.
- To help manage ongoing college costs, consider also applying for scholarships and federal student loans.
Pros and cons of using a home equity loan to pay for college
Pros
- Flexibility. You can use proceeds from a home equity loan for various purposes, including tuition, room and board, supplies and textbooks.
- Potentially better interest rate. Home equity loan rates are usually lower than the rates on private student loans, personal loans and credit cards. A lower rate means more affordable payments and lower interest charges.
- Might be easier to qualify for. Since home equity loans are secured loans (backed by an asset — in this case, your home), lenders might be more flexible than they are with an unsecured loan when it comes to eligibility requirements.
Cons
- Your home is used as collateral. Since your home secures a home equity loan, defaulting on the loan can put you at risk of losing your home to foreclosure. It’s crucial to review your budget and ensure you can afford the loan before applying.
- Home equity loan rates are currently high. Though home equity loan rates are still relatively low compared to some other financial products, their rates are trending a bit higher than they were in the past. Average rates for a $50,000 home equity loan are currently 6.50%.
- Loan proceeds may not be enough. Depending on how much your college expenses are, a home equity loan might not be enough to cover everything. If this occurs, you’ll need to consider alternatives to bridge the gap, including pulling from savings or taking out a personal loan.
Should you use home equity to pay for college?
Tapping your home equity to pay for college can make sense for some families, but like any major financial decision, it depends on your specific situation and circumstances. Here are a few questions to ask yourself to help you determine if borrowing against your home equity is the right option:
- Do you have sufficient home equity? You’ll typically need at least 15% home equity to qualify for a home equity loan. Home equity is the difference between your home’s current market value and your remaining mortgage balance.
- Can you afford the monthly payment? Take an honest look at your budget and overall financial situation to determine whether you can afford to take out a home equity loan. Since a home equity loan is considered a second mortgage, you’ll now have two mortgage payments to manage each month.
- Is your credit in decent shape? Your credit score affects your eligibility for a home equity loan as well as the rate you receive. You’ll generally need at least a 620 credit score to qualify for a home equity loan, though the minimum requirements vary by lender.
- Are you nearing retirement age? Using your home equity to pay for college means you won’t have as much equity to fall back on for unexpected expenses during your retirement years.
How to get a home equity loan to pay for college
1. Calculate your home equity
The first step is to determine if you have enough equity to qualify for a home equity loan. Mortgage lenders will typically look for a maximum 85% loan-to-value (LTV) ratio, which, as mentioned above, equates to 15% home equity. Not sure how much equity you have? Learn more about how to calculate your home equity.
2. Understand how much cash you’ll need
Next, you’ll want to take a look at your total education costs, after factoring in any financial aid, grants or scholarships you’re eligible for. If the costs are more than the amount of home equity you can access, you’ll need to supplement with other types of financing or savings.
3. Compare home equity loans and HELOCs
Aside from home equity loans, home equity lines of credit (HELOCs) are a common way to tap your equity. Unlike home equity loans, HELOCs provide a revolving line of credit you can reuse (versus a lump sum), so they’re a good option if you’ll need it for ongoing education expenses. HELOC rates are typically variable, meaning your rate (and payment) can change if market rates do.
4. Shop around for lenders
Rates and terms vary by lender, so while it may seem overwhelming, it does pay to shop around. Many lenders have prequalification tools you can use to view your loan options without affecting your credit score, helping you find the best rates and terms.
5. Submit an application
Most lenders allow you to apply online. In general, you’ll need the following documents:
- Your Social Security number
- Recent utility bills as proof of address
- Recent pay stubs
- Current mortgage statement
- Property tax statements
- Tax returns
- Driver’s license or another government-issued ID
Most lenders will also require a new home appraisal to determine your home’s current value.
Alternatives to using a home equity loan for college
Student loans
One of the most common ways to pay for college is with student loans, whether federal (offered by the government) or private (offered by private lenders). Federal student loans offer unique benefits like fixed interest rates, flexible repayment structures and deferral options. One major drawback are the loan limits — undergraduate students can only borrow up to $31,000 if they’re dependent on their parents and up to $57,500 if they’re independent.
Private lenders, such as banks and credit unions, offer private student loans. They generally carry higher interest rates than federal student loans and don’t provide the same repayment flexibility. Additionally, some private student loans have variable interest rates, meaning they can change during the repayment term, potentially increasing your monthly payment.
Financial aid
Make sure your family fills out the Free Application for Federal Student Aid (FAFSA). The FAFSA is what will help your child qualify for grants, federal student loans, institutional aid and work-study programs.
Tuition payment plans
Some colleges allow you to pay education expenses in installments over a single semester or term. These plans vary by school and are typically interest-free. However, there might be enrollment fees, late fees and returned payment fees.
Cash-out refinance
With a cash-out refinance, you take out a new mortgage for more than you currently owe and receive the difference in cash (which you can use to pay for college). However, if you already have a low-rate mortgage, this approach is less helpful, since you’re replacing your current mortgage with a new one at today’s higher rates.
Learn more about whether a cash-out refinance, home equity loan or HELOC is right for you.
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