Graduation season is just around the corner, and if you are the parent of a senior, then you may already be worrying about the expense of college.
If you have managed to build up equity in your home over the years, then it might make sense for you to tap into it to help with the cost of college. This is not a decision to be made lightly, as you are using an investment that you have worked hard for to now invest in the future of your child.
Explore All Your Options
Before looking at refinancing your home or taking out a home equity loan against it, make sure all other options have been exhausted. Some students may qualify for financial aid or scholarship programs. With the high cost of a college education, even an added boost of $500 a month will be a big help. Ensure that your child has gone over all possibilities of student aid programs with their high school guidance counselor when it comes to paying for higher education.
Federal Student Loans
Federal student loans are also another path you and your family can pursue. Compared with a private student loan, a federally backed loan will usually come with a lower fixed interest rate. In addition, repayment is based on their income and they will have options to postpone payments if necessary without damaging their credit score. You can use this type of loan to cover a portion of the cost and make up the difference from a refinance loan on your house. In this way the debt is split between you and your child, hopefully giving them more incentive to do well in school. Private student loans are not nearly as forgiving and may leave your child with a debt they cannot afford after graduation.
Once you have secured as much funding from outside sources as you can, you can start to consider your homes’ equity to secure the difference. With interest rates still hovering around 4.5% and lower, now is a good time for a refinance loan. All indicators are pointing to that number rising about 4% before the end of 2014.
Refinance, Home Equity Loan, or Home Equity Line of Credit
A cash out first mortgage refinance is the better choice over a home equity loan or a home equity line of credit. The interest rate may be a bit higher than refinancing with no cash out, but it will be significantly lower than a home equity loan. Plus, remember the added benefit of being able to use the interest paid on a refinance as a tax write-off. A home equity line of credit may have an appealing low interest rate, plus the ability to draw from the money as needed, but this type of loan is adjustable. That means that if things go as predicted, your interest rate on that line of credit will jump substantially over the next few years.
This is not a decision to be made lightly, which is why you should be considering your options now before you even see the high school diploma. You can begin taking some steps to further improve on the value of your house, increasing your odds of securing a loan at a reasonable rate. Remember, if you are able to do it, there is no other investment opportunity that is nearly as rewarding as the one you can make in your own child’s future. Call SeanZMortgage at (314) 361-9979.
Photo credit: Chris Campbell via Flickr