Can I Use a Home Equity Loan for College Tuition?
Yes, you could use a home equity loan for college tuition; in addition, you could use a home equity line of credit, or “HELOC.” Although a home equity loan and HELOC are similar, they are not the same. Both rely on the amount of equity you have in your home, but the HELOC is more like a credit card with a variable rate, whereas a home equity loan is a traditional loan.
With a home equity loan, you will have a fixed interest rate, repayment period and monthly payments. Home equity loan terms typically range between five and 30 years. In addition, you will have to pay closing costs such as application fees, the cost of an appraisal and attorneys fees.
Pros and cons of using a home equity loan for college
Taking out a home equity loan for college can come with many benefits, but there are some downsides as well. It’s important to review both the pros and the cons of home equity loans to determine if paying college tuition with a home equity loan is the right choice for you.
You could enjoy low interest rates. When you get a home equity loan for college tuition, you often can get a better interest rate than you would from other loans, especially if you have excellent credit.
You would have a fixed interest rate. Because a home equity loan has a fixed interest rate, you will know exactly what you’ll have to pay each month for the life of the loan.
You could have a longer loan term, if needed. Home equity loans may be extended for up to 15 years, which could make the loan more affordable by reducing your monthly. However, you will pay more in interest over the term of the loan.
Your house is used as collateral. Because you’ll have to use your house as collateral to get the loan, the lender could foreclose on your home if you can’t make payments. If you think you may have difficulty making consistent monthly payments, this may not be a risk you want to take.
You will have to pay closing costs. Like a traditional mortgage, you’ll have to pay closing costs: application fees, appraisal fees and attorneys fees, for example.
The application process is long. The process of applying for a home equity loan is similar to that of applying for a mortgage, meaning it could take a while.
You won’t have a tax deduction. Interest on your home equity loan is only tax-deductible when the money is used to buy, build or substantially improve your home.
You could enter a cycle of debt. A home equity loan reverses some of the progress you’ve made in paying down your mortgage.
You may not have the equity you need. If you’ve already tapped your home equity through a different home equity loan or HELOC, you may not be able to borrow more or borrow enough to pay for the necessary college costs.
Should you borrow a student loan or home equity loan?
When considering the best way to pay for college, both student loans and home equity loans offer good options for financing college tuition. Of course, there are some drawbacks as well. Therefore, it’s important to examine several factors to determine which loan option is the best fit for your financial needs.
Are you looking at a federal student loan or private loan?
Will it be in your name or your child’s name? The answers to these questions can affect how much you may borrow, the interest rate and the repayment terms. For instance, current interest rates for federal student loans in your child’s name start at 2.75%, while the rate for these loans as a parent would be 5.30%. Rates on private student loans in your child’s name can range from 1.24% and 12.59%, depending on the degree, and between 3.99% and 13.99% in your name. Although rates change frequently, recent average interest rates for a 15-year fixed-rate home equity loan is 5.82%, according to ValuePenguin.
How close are you to retirement?
If you are nearing retirement, will your retirement income cover the expense of a home equity loan? If you are still paying on your first mortgage, you now will need to pay for two mortgages, which could be tough on a fixed income.
What repayment term could you afford under a home equity loan?
Home equity loan terms typically range from five to 30 years, which can help you determine what works best for your budget. For example, if you can afford a larger monthly payment, you may be able to finance for a shorter loan term, which could save you money in interest. However, you may need a longer term in order to afford the monthly payments, but this will result in paying more interest over the life of the loan.
Do you have any plans to move before the home equity loan term expires?
If you know you’ll be moving before the home equity loan term is up, how would you pay off the loan? It’s possible you could pay it off from the proceeds of the home sale, but you could be left without the funds to pay toward your next home if your equity goes down. As such, a student loan could offer a better repayment scenario because you can continue to make payments regardless of whether you move or not.
Will you be paying for more than one child in college at the same time?
If you have more than one child attending college at the same time, using a home equity loan for college tuition may not be sufficient for providing the funds necessary to pay for multiple students. It’s possible you may need a combination of student loans and a home equity loan to accumulate the money needed for financing college tuition.
You have a lot of options to pay for college, including taking out student loans or leveraging your home equity. With college costs as high as they are, using your home equity could be a viable option as long as you understand you’re putting your home at risk and the new debt comes with fees.
You’ll need to evaluate all your available options in the context of your entire financial situation, as well as what you expect your child to get out of his or her college education.
If you can handle the extra monthly payment, if the cost won’t prevent you from reaching other financial goals and if the extra money will significantly improve your child’s future prospects, then a home equity loan may be a good move.