home equity

Home equity to pay son's college costs?

Don TaylorDear Dr. Don,
As a parent, is it a good idea to use my home equity loan to pay my son's current and future college tuition? Another option is to refinance my home and use the equity to pay for these education expenses. Are these better options than taking a private student loan?
-- Paul Purdue

Dear Paul,
Using the equity in your home to pay for your child's college expenses can make financial sense. In most cases, the mortgage interest will be tax deductible. Given today's low interest rates, that should cost substantially less than the rate charged for student loans.

At the same time, try to avoid getting saddled with mortgage debt if it keeps you from achieving other financial goals, such as savings and retirement funding. You are, in a sense, investing in your child by helping him pay for college. Sacrificing your own future to fund that education isn't a decision to take lightly.

When it comes to paying for college, it's best to start with federal student loans first before taking out private student loans. I like the idea of requiring the student to "have some skin in the game," by having him take some loans to fund his college costs. That, however, may not be what you've agreed on as a family.

If your son is near college age, I like the idea of a cash-out first mortgage refinancing rather than a home equity loan. While a cash-out first mortgage has a higher interest rate than refinancing with no cash out, it should be at a substantially lower interest rate than a home equity loan or a home equity line of credit, or HELOC. The HELOC option might sound good because you take the money out as you need it, but it's an adjustable-rate loan. We expect interest rates will be headed higher over the time you'd borrow and pay back this money. So that might not be as attractive as it first seems.

Home equity loans and HELOCs typically have much lower closing costs than a first mortgage refinancing, but you should be able to recapture the closing cost differential through lower interest rates.

As I write this, the Bankrate national average for a home equity loan is 6.05 percent and 5.04 percent for a HELOC. A 15-year fixed-rate mortgage is at 2.96 percent.

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