31
Jan
By Fred Gruber
Mortgage

Should You Use Home Equity to Pay for College?

Higher education can be one of the most significant financial investments you’ll make, second only to purchasing a home. While federal loans are a common method for covering college costs, using your home’s equity is another option to consider. Before making a decision, it’s important to understand the pros and cons of tapping into your home equity to pay for college.

The Financial Cost of College

Just as most buyers need a mortgage to finance a home, many families rely on loans to fund college expenses. The average net price of college, which accounts for tuition, room, and board after financial aid, can be significant. According to the College Board, during the 2019-2020 school year, the average annual net price was $27,400 for private colleges and $15,400 for public institutions.

Advantages of Using Home Equity for College

For families exploring ways to pay for college, home equity loans or Home Equity Lines of Credit (HELOCs) may present some unique benefits.

1. Bridging the Gap Beyond Federal Loans

Federal loans often have borrowing limits that may not fully cover the cost of tuition, room, and board. Home equity loans can help close the gap. You can typically borrow up to 85% of your home’s equity as either:

  • A Lump-Sum Loan: A fixed amount borrowed with regular monthly payments.

  • A HELOC: A revolving line of credit with variable interest rates, offering more flexibility.

2. Lower Interest Rates

Home equity loans usually have lower interest rates compared to federal PLUS loans or private student loans. Since these loans are secured by your home, lenders can offer more favorable rates, saving you money over the life of the loan.

3. Immediate Access to Funds

Home equity loans or HELOCs allow quick access to funds, making them ideal for unexpected expenses or semester payments. A HELOC, in particular, offers flexibility by allowing you to borrow only what you need, reducing the amount of interest you pay. For example, if you open a $50,000 HELOC but use only $20,000, you’ll owe interest only on the $20,000, potentially saving you money.

Disadvantages of Using Home Equity for College

While there are advantages, it’s equally important to consider the potential downsides of using home equity for education costs.

1. Risk of Losing Your Home

Since your home serves as collateral for a home equity loan or HELOC, failure to make payments could result in foreclosure. Unlike federal student loans, which do not jeopardize your home, defaulting on a home equity loan carries significant risks. Carefully evaluate your financial situation before proceeding.

2. Limited Tax Benefits

The Tax Cuts and Jobs Act of 2017 eliminated the tax deduction for home equity loan interest unless the funds are used to improve your home. This means you cannot deduct home equity loan interest used for education expenses. In contrast, federal or private student loans may qualify for a Student Loan Interest Deduction of up to $2,500 annually.

3. Long-Term Financial Impact

Using home equity for college ties up a major asset that could otherwise be used for emergencies, retirement, or other future needs. It’s important to weigh whether reducing your home equity is worth the potential long-term financial impact.

Making the Right Decision

If you or your child are preparing for college, now is the time to explore your financing options. Home equity loans can be a viable choice for covering education costs, especially if:

  • Federal loans don’t meet your needs.

  • You’re confident in your ability to make payments.

  • You prefer lower interest rates and flexible borrowing options.

However, weigh the risks carefully, particularly the potential impact on your home and finances. Speak with a financial advisor or lender to determine whether using your home equity aligns with your overall financial goals.

 

08
Oct
By Fred Gruber
Credit Scoring

Consolidate Credit Card Debt with a Cash-Out Refinance

If you’re feeling overwhelmed by credit card debt, a cash-out refinance may be an effective way to manage it. This type of mortgage allows you to utilize your home’s equity to pay off high-interest credit cards, consolidating them into a single, lower-interest mortgage payment.

How a Cash-Out Refinance Works

A cash-out refinance lets you replace your current mortgage with a new one for more than what you owe. The difference is then given to you as cash, which you can use to pay off your high-interest debt. Here’s how the process works:

  1. Apply for a Cash-Out Refinance: You start by applying for the refinance.
  2. Home Appraisal: Your lender will arrange for an appraisal to determine your home’s value and how much equity you can access.
  3. Borrowing Limits: Typically, you can borrow up to 80% of your home’s equity, minus the remaining balance on your current mortgage.
  4. Debt Payoff: The lender will use the cash from the refinance to pay off your credit card and other high-interest debts.
  5. New Monthly Payments: You’ll begin making monthly payments on your new mortgage, which often comes with a lower interest rate than what you were paying on your credit cards.

Advantages of Using a Cash-Out Refinance to Consolidate Debt

  1. Lower Interest Rates: Mortgage rates are typically much lower than credit card interest rates, so you could significantly reduce the amount of interest you’re paying.
  2. Easier to Budget: Instead of making multiple payments to various credit card companies, you’ll only have one mortgage payment each month, making your finances easier to manage.
  3. Boost to Your Credit Score: Paying off high-interest credit cards can improve your credit score, which may make it easier for you to qualify for loans or credit in the future.

Risks to Be Aware Of

While the benefits are appealing, it’s important to consider the risks:

  1. Home Foreclosure: Since your home is used as collateral, failing to make payments could result in foreclosure, putting your home at risk.
  2. Paying More Interest Over Time: If you extend your mortgage term, you might end up paying more in interest over the life of the loan, even if your monthly payments are lower.
  3. Reduced Home Equity: Tapping into your home’s equity decreases your ownership stake, which could limit future borrowing options or reduce the proceeds if you decide to sell your home.

A cash-out refinance can be an excellent tool for consolidating high-interest credit card debt and reducing your monthly financial obligations. However, it’s important to carefully weigh both the benefits and risks, particularly regarding the impact on your home equity. Consulting with a mortgage professional or financial advisor can help ensure you make the best choice for your financial future.

01
Oct
By Fred Gruber
Home Mortgage

How Much Equity Can You Borrow Today?

Your home equity represents one of your most valuable assets. When it comes to borrowing against that equity, many homeowners question how much can they borrow. Understanding the amount of equity you can tap into today is essential, especially if you’re considering a home equity loan or line of credit (HELOC) for major expenses like home improvements, debt consolidation, or other financial needs.

What is Home Equity?

Home equity is the difference between your home’s current market value and the outstanding balance on your mortgage. As you pay down your mortgage and your property’s value increases, your equity grows. The more equity you have, the more borrowing power you hold.

Factors That Determine How Much You Can Borrow

When borrowing against your equity, lenders typically allow you to access up to 85% of your home’s value, minus what you owe on your mortgage. This percentage is known as your Loan-to-Value (LTV) ratio. For example, if your home is worth $500,000 and you still owe $250,000, you may be able to borrow up to $175,000 (85% of $500,000 is $425,000, and subtracting the $250,000 mortgage leaves you with $175,000 in available equity).

Lenders will also consider your credit score, income, and current debt levels when deciding how much equity they are willing to lend.

Types of Equity Loans

There are two primary ways to borrow against your home’s equity:

  1. Home Equity Loan: A lump-sum loan with a fixed interest rate, repaid over a set term.
  2. Home Equity Line of Credit (HELOC): A revolving credit line that you can draw from as needed, often with a variable interest rate.

Benefits of Borrowing Against Equity

Borrowing against your home’s equity can offer several advantages, including:

  • Lower Interest Rates: Since these loans are secured by your property, they often have lower interest rates compared to personal loans or credit cards.
  • Tax Benefits: In some cases, the interest you pay on home equity loans may be tax-deductible. Check with a tax professional for details.
  • Flexible Uses: Whether it’s for home renovations, education costs, or debt consolidation, using your home’s equity gives you financial flexibility.

Key Considerations Before Borrowing

Before tapping into your home’s equity, it’s important to weigh the risks:

  • Increased Debt: Borrowing against your home increases your overall debt, which could affect your financial stability if not managed wisely.
  • Risk of Foreclosure: Failing to repay a home equity loan or HELOC could put your home at risk of foreclosure.
  • Market Fluctuations: If home values decline, you could owe more than your home is worth, making it difficult to sell or refinance.

Is Now the Right Time to Borrow?

With interest rates fluctuating, it’s a good idea to consult with a mortgage professional to explore your options. They can help you determine whether borrowing against your equity makes sense for your current financial situation.

If you’re thinking about using your home’s equity, understanding how much you can borrow is the first step. Contact us today to discuss your unique situation and get tailored advice on how to make the most of your home’s value.