equity can be source of tuition money
With the cost of college rising steadily, parents may not have enough money even if they've been saving in a 529 plan. One source of additional money could be the equity in the home.
Although a home equity line of credit is an option, experts say, borrowers should be aware of some pitfalls.
"A lot of people really
don't qualify for a lot of financial aid because
their incomes are so high. Nevertheless, they
haven't put a lot of money aside for college,"
says Michael T. Ryan, a Certified Financial
planner with Professional Planning Group in
Westerly, R.I. "They're left with just
having to borrow the money on their own, and
the line of credit is a pretty convenient
and tax-advantaged way to do that."
The benefits of using the house to pay for college education stem from several rate and cost characteristics of a home equity line of credit, or HELOC. They are less expensive than personal loans, for example, and aren't subject to the income limits that bar some families from obtaining government-backed loans. Most usually have tax-deductible interest as well, because, like a regular mortgage, they use a borrower's home for collateral.
Another advantage is that a HELOC is more flexible than home equity loans, or second mortgages. That's because people can take out the amount of money they need when they need it, making them ideal for families with kids who are heading off to college at staggered times.
Rates are competitive, too, when compared with unsecured personal loans although they're slightly above home equity loans. In the latest Bankrate.com national survey, for instance, the average rate for a home equity line of credit was 8.18 percent, compared with 7.94 percent for a home loan. Personal loans run from about 13 percent up. The interest rates on HELOCs float during the life of the loan, however, while other types of loans establish fixed rates.
Finally, lenders often eat closing costs for borrowers who activate their lines right away by putting a balance on them or for people with high credit limits.