Home Equity Loan to Pay for College

Home Equity Loan

2010
12.20

Home equity loans are popular for homeowners, especially for upper middle class (UMC) homeowners who want to increase the value of their house. Say you’ve owned a house for 20 years and still have the same kitchen and bathrooms. An option is to take out a home equity loan to pay for the entire renovation. Home equity loans are also used to finance other home repairs, medical bills and college education. Let’s examine using a home equity loan for college financial planning.

Firstly, home equity is the market value of your home minus any balance on your mortgage or liens. In the good ole days, homeowners were lucky. Their equity rose just by living in a house for 30 years. For example, UMC homeowners who build or bought their houses in the 1960s or 1970s for $50,000 have seen their value appreciate. That same house is now worth $350,000. Lucky them.

With the fall of the real estate market, home equity has plummeted as well. This downturn has hit many UMC homeowners in the wallet. A house that was worth $500,000 in 2007 is now worth $350,000. UMCs should not be scared of the fall in prices–home values are simply returning to what they should be. The inflated market values of before were a ruse.

So now that we have realistic market values, UMC families can look at their home equity realistically, especially if it’s time to send a child or children to college. Many parents do not realize the benefits of a home equity loan when paying for college. Here are the benefits:

When taking out a home equity loan, you lessen the equity of your home temporarily. This lowers your assets in the eyes of financial aid officers. Overall, it lowers your Expected Family Contribution (EFC), which is great.
A home equity loan has tax deductible interest.
The interest rates are usually pretty low.

Anything that lowers your EFC should get you excited and planning. Also, tax deductible interest is a rarity these days, not many loans have this luxury. So take advantage if possible.

If you are about to put a child through college, it may be in your family’s best interest to take out a home equity loan during the base year. Always consult with a reputable financial adviser and accountant before taking out a loan. But if they give you the green light, take out a home equity loan to pay for college and get the dream kitchen you’ve always wanted.