to use home equity to pay for college

how to use home equity to pay for college?

Home Equity / Lines of Credit

If parents are willing to help but don't have the resources available, a Home Equity Loan or Line of Credit may be an option. Home Equity Loans have become more attractive for families in an income bracket that is beyond the interest deductions established for the PLUS loan.
A Home Equity Loan is a lump sum one-time payment.
A Home Equity Line of Credit allows families to borrow what they need when they need it, with a cap that may not be exceeded.
Interest on most home equity loans is fully tax-deductible, as opposed to other types of consumer debt.
The income tax deduction cap for home equity debt is $100,000 beyond the original mortgage loan.

Most borrowers who intend to use the funds for college education, choose the line of credit. A line of credit allows more flexibility and delays the cost until it is necessary. Most lines of credit are typically divided into two phases. The "draw" period, when a parent can borrow as needed, and a repayment period.

Today it is best to shop around. Lenders are competing for business and offer many perks. Some lines of credit may offer interest-only payments for a number of years, zero closing costs, or the option of switching from a variable to a fixed interest rate if the prime rate increases.

Federal Trade Commission (FTC) Warnings

As home equity becomes a more popular tool for financing college costs, more and more consumers are falling victim to lending fraud. The FTC has put out the following guidelines for identifying parents who may be the victim of fraud. Some of the warning signs include:

if a family isn't sure if they have a loan or a line of credit;
if the family says they were told to borrow more than they wanted to;
if they don't know how they'll make the high monthly payments; or
they don't know the terms of their loan because either they signed blank forms, or were refused a copy of the documents they signed.
Target populations for this type of fraud include:

older parents;
low income families who own their own home; and
parents with adverse credit who haven't been able to get other consumer products.

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What Is A Home Equity Loan ?

A home equity loan, also known as a second mortgage, lets homeowners borrow money by leveraging the equity in their homes. Home-equity loans exploded in popularity in 1996 as they provided a way for consumers to somewhat circumvent that year's tax changes, which eliminated deductions for the interest on most consumer purchases. With a home-equity loan, homeowners can borrow up to $100,000 and still deduct all of the interest when they file their tax returns. Here we go over how these loans work and how they may pose both benefits and pitfalls.

Two Types of Home-Equity Loans Home equity loans come in two varieties - fixed-rate loans and lines of credit - and both types are available with terms that generally range from five to 15 years. Another similarity is that both types of loans must be repaid in full if the home on which they are borrowed is sold.
Fixed-Rate Loans
Fixed-rate loan provide a single, lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan.
Home-Equity Line of Credit
A home-equity line of credit (HELOC) is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the HELOC has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.
Benefits for Consumers Home-equity loans provide an easy source of cash. The interest rate on a home-equity loan - although higher than that of a first mortgage - is much lower than on credit cards and other consumer loans. As such, the number-one reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to pay off credit card balances (according to bankrate.com). Interest paid on a home-equity loan is also tax deductible, as we noted earlier. So, by consolidating debt with the home-equity loan, consumers get a single payment, a lower interest rate and tax benefits.

Benefits for Lenders Home-equity loans are a dream come true for a lender, who, after earning interest and fees on the borrower's initial mortgage, earns even more interest and fees. If the borrower defaults, the lender gets to keep all the money earned on the initial mortgage and all the money earned on the home-equity loan; plus the lender gets to repossess the property, sell it again and restart the cycle with the next borrower. From a business-model perspective, it's tough to think of a more attractive arrangement.

The Right Way to Use a Home-Equity Loan Home-equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to repay the loan, its low interest rate and tax deductibility of paid interest makes it a sensible alternative. Fixed-rate home-equity loans can help cover the cost of a single, large purchase, such a new roof on your home or an unexpected medical bill. And the HELOC provides a convenient way to cover short-term, recurring costs, such as the quarterly tuition for a four-year degree at a college.
Recognizing Pitfalls The main pitfall associated with home-equity loans is that they sometimes seem to be an easy solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending and sinking deeper into debt. Unfortunately, this scenario is so common the lenders have a term for it: reloading, which is basically the habit of taking a loan in order to pay off existing debt and free up additional credit, which the borrower then uses to make additional purchases.

Reloading leads to a spiraling cycle of debt that often convinces borrowers to turn to home-equity loans offering an amount worth 125% of the equity in the borrower's house. This type of loan often comes with higher fees because, as the borrower has taken out more money than the house is worth, the loan is not secured by collateral. Furthermore, the interest paid on the portion of the loan that is above the value of the home is not tax deductible.



If you are contemplating a loan that is worth more than your home, it might be time for a reality check. Were you unable to live within your means when you owed only 100% of the value of your home? If so, it will likely be unrealistic to expect that you'll be better off when you increase your debt by 25%, plus interest and fees. This could become a slippery slope to bankruptcy.

Another pitfall may arise when homeowners take out a home-equity loan to finance home improvements. While remodeling the kitchen or bathroom generally adds value to a house, improvements such as a swimming pool may be worth more in the eyes of the homeowner than the market determining the resale value. If you're going into debt to make cosmetic changes to your house, try to determine whether the changes add enough value to cover their costs.

Paying for a child's college education is another popular reason for taking out home-equity loans. If, however, the borrowers are nearing retirement, they do need to determine how the loan may affect their ability to accomplish their goals. It may be wise for near-retirement borrowers to seek out other options with their children.

Should You Tap the Equity in Your Home? Food, clothing and shelter are life's basic necessities, but only shelter can be leveraged for cash. Despite the risk involved, it is easy to be tempted into using home equity to splurge on expensive luxuries. To avoid the pitfalls of reloading, conduct a careful review of your financial situation before you borrow against your home. Make sure that you understand the terms of the loan and have the means to make the payments without compromising other bills and comfortably repay the debt on or before its due date.
The Home-Equity Loan: What It Is And How It Works

by Jim McWhinney

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Why use a home equity loan?

Many people take advantage of this financial instrument for renovations or the purchase of a car. Because it is secured to a house - for most people, the largest asset they'll ever possess - this type of loan allows for a longer amortization. The typical car loan is amortized for a maximum of seven years; with a home equity loan, you can amortize it up to 25 years. You can make smaller payments over an extended period, but that also means you'll incur more interest.

After 25 years, you're obliged to renegotiate your loan. But there's nothing stopping you from reapplying sooner. If you got a $50,000 home equity loan five years ago and in the interim repaid $30,000 of it, you can apply to be bumped back up to the $50,000 plateau, but at more current rates (which can be good or bad, depending on the economy).

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What are home equity loan ?

A home equity loan (sometimes abbreviated HEL) is a type of loan in which the borrower uses the equity in their home as collateral. These loans are sometimes useful to help finance major home repairs, medical bills or college education. A home equity loan creates a lien against the borrower's house, and reduces actual home equity.

Home equity loans are most commonly second position liens (second trust deed), although they can be held in first or, less commonly, third position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios. Home equity loans come in two types, closed end and open end.

Both are usually referred to as second mortgages, because they are secured against the value of the property, just like a traditional mortgage. Home equity loans and lines of credit are usually, but not always, for a shorter term than first mortgages. In the United States, it is sometimes possible to deduct home equity loan interest on one's personal income taxes.

There is a specific difference between a home equity loan and a Home Equity Line of Credit (HELOC). A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a one time lump-sum loan, often with a fixed interest rate.

Closed end home equity loan
The borrower receives a lump sum at the time of the closing and cannot borrow further. The maximum amount of money that can be borrowed is determined by variables including credit history, income, and the appraised value of the collateral, among others. It is common to be able to borrow up to 100% of the appraised value of the home, less any liens, although there are lenders that will go above 100% when doing over-equity loans. However, state law governs in this area; for example, Texas (which was, for many years, the only state to not allow home equity loans) only allows borrowing up to 80% of equity.

Closed-end home equity loans generally have fixed rates and can be amortized for periods usually up to 15 years. Some home equity loans offer reduced amortization whereby at the end of the term, a balloon payment is due. These larger lump-sum payments can be avoided by paying above the minimum payment or refinancing the loan.

Open end home equity loan
This is a revolving credit loan, also referred to as a home equity line of credit, where the borrower can choose when and how often to borrow against the equity in the property, with the lender setting an initial limit to the credit line based on criteria similar to those used for closed-end loans. Like the closed-end loan, it may be possible to borrow up to 100% of the value of a home, less any liens. These lines of credit are available up to 30 years, usually at a variable interest rate. The minimum monthly payment can be as low as only the interest that is due.

Typically, the interest rate is based on the Prime rate plus a margin.

Home equity loan fees
Here is a brief list of possible fees that may apply to your home equity loan: Appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off and other costs are often included in loans. Surveyor and conveyor or valuation fees may also apply to loans, some may be waived. The survey or conveyor and valuation costs can often be reduced, provided you find your own licensed surveyor to inspect the property considered for purchase. The title charges in secondary mortgages or equity loans are often fees for renewing the title information. Most loans will have fees of some sort, so make sure you read and ask several questions about the fees that are charged.

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How a Debt Consolidation Loan Works .

A debt consolidation loan is essentially a home equity loan or refinance mortgage, which is used specifically for consolidating high interest debt into a lower fixed rate monthly payment. Fixed rate debt consolidation loans are amortized to be paid off at the end of the term, eliminating the debts.

It's possible to save more money by converting high interest rates, and daily compounded interest on credit cards, and other debt, into a lower rate loan with simple annual interest. More savings may come from tax deductible interest when a loan is placed on an owner occupied residence.

$40,000 of debt at an average credit card interest rate of 15%, might have a payment of about $560 per month, when amortized over a 15 year term. A debt consolidation loan term at 8% would have a payment of about $382 over the same time period, which could save $178 per month. If your goal is pay off your debt as soon as possible, the loan term could be reduced to about 8 years by applying the monthly savings to the debt consolidation loan payments.

In addition to reducing your rates, eliminating compound interest can add to your total monthly savings. In this example, you may save another $50 per month by converting to a simple interest debt consolidation loan, instead of making minimum payments on credit cards. It's possible that daily compounded interest on credit cards can accumulate to more than the minimum monthly payments, which can result in paying interest on the interest accumulating on the account. Consolidating debt into a fixed payment schedule can help eliminate the never-ending minimum payment cycle.

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How Does a Home Equity Loan Work?

Fixed rate, simple interest home equity loans, can be secured by a first or second lien on the title deed of a residential home. The amount of home equity that is available for a loan is determined by the difference between the appraised value of the property, and the balance on the first mortgage.

With a fixed rate home equity loan, the lender makes a one-time payment of the full amount that is borrowed, which is paid to you at the closing of the loan process. If you have an existing second mortgage, line of credit, or equity loan on your home, it will need to be paid off with the proceeds of your new loan, so be sure to request a sufficient amount of money to include the existing loan.

The available loan programs can vary, and the maximum loan to value, depending on the specific lender. Other options can include a zero cost loan, or loans for borrowers with bad credit, which usually require more equity. Home equity rates can vary depending on risk factors such as, credit scores, the amount of the loan, and the loan to value.

Tax deductible home equity loan interest provides an additional incentive to pay off high interest debts, make home improvements, or take cash out. When a loan is secured by a lien on your primary home, the interest payments may be tax deductible within allowed limitations, which can be the lesser of $100,000 or a maximum 100% of the home value.

Loan terms can range from 10, 15, 20, or 30 years. A longer term provides a lower monthly payment, but also means you will pay more interest over the life of the loan. For example, the payment on $100,000 for 30 years may be about $200 less per month than a 15 year term, however, the interest charges could be more than double, if paid over the full 30 year term.

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125% home equity loan

What is a 125% home equity loan?

The is a second mortgage that allows you to borrow more than what your home is worth. You can borrow up to 125% of your home's value. This is an ideal loan for you if you have no equity in your home. If you have a VA or a FHA loan or want to payoff a second mortgage to get some extra cash this one is for you. Its generally tax deductible up to 100% of the value available of the house.

How does it works ?

This is a FICO based program with a minimum of 640 middle fico score required. Presently there are no exceptions. For example, if your house is worth $100,000 then you would be allowed to borrow a combined total of $125,000 between your first and second mortgage.You have to be in the property for at least 6 months or to be a previous owner.

Why should I apply ?

Pay off credit cards,and other debt.
Lower your payments by hundreds of dollars each and every month, and make only one easy monthly payment.
Make home improvements, pay college tuition, or just take a vacation.
Tax deductions ( please consult your CPA)
What is the criteria for this loan ?

FICO Scores 640 and above.
Some Cash Out restrictions
Loan amounts $30,000 and above
For A Credit borrowers
Bankruptcy 5 years discharged.
Appraisal required for amounts above $35,000
Six months in the property or a previous home owner.

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Paying Student Loans With Home Equity

When students graduate from college, they begin to enjoy the fruits of their labors. Many land good jobs, and some buy new homes. After a few years of home ownership, if the market is rising, they may also eyeball their student loans, and consider the pros and cons of using a home equity loan to pay off their debts.


If you're a college graduate with student loans, you probably envision having to pay your debts for years to come. While the prospect of becoming debt-free seems like a pipe dream, it can happen much sooner if you manage your debt intelligently. But does smart debt management include using a home equity loan to pay off your student loans? Like anything in the financial world, this option has a variety of pros and cons.

Lower rate, tax deductible interest
At first glance, consolidating your student loans into a home equity loan seems like a no-brainer. Because a home equity loan uses your property as collateral, banks can offer it at a lower rate than most private student loans. The lower rate alone can save you thousands of dollars in long-term interest payments, and you also get added tax benefits. Interest paid on a home equity loan is tax-deductible, which will lower your overall costs.

A home equity loan is a fixed-rate, fixed-term loan. The fixed rate can be extremely appealing, as private student loans often include variable rates. If you're conservative with your money, eliminating uncertainty may help you sleep better at night.

A home equity line of credit (HELOC), which is a line of credit based on the equity in your house, will also help you pay off your student loans. As an added bonus, you can use the HELOC as an emergency source of funds if you get into a crunch. The interest is still tax-deductible, but be forewarned: the rate on a HELOC is variable, and can spike upwards.

Notice the rewards; consider the risks
Choosing a home equity loan to repay your student indebtedness has plenty of rewards, but you do need to be aware of the risks. First and foremost, a home equity loan uses your house as collateral. If you run into tough times, and have to default on your mortgage, you could lose your home.

While you'll gain a tax deduction for interest paid on your home equity loan, you'll lose the deduction that comes with student loan interest. You'll need to run the numbers to see which loan benefits you the most.

The future for most college graduates will include years of debt payments. Between mortgages and student loans, it may seem like you'll be mired in debt until the end of time. However, smart management of these debts-such as paying off your student loan with a home equity loan-can save you thousands of dollars. Understand your options, and you'll be on your way to a debt-free life.


Paying Student Loans With Home Equity
By: Greg Mischio

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Student loan or home equity financing?

That is the question. And a lot of parents are asking it. In fact,

"So could you maybe tell me which way is the better way to go to finance my daughter's college. She is a freshman and I'm not sure if I should do a Home Equity loan or try to get her a loan through her school's student loan program. She's going to Ol' Miss!"

The short answer is: It depends. There are several key differences to consider between these types of financing.

Generally, before considering any other type of financing, students should fill out the Free Application for Federal Student Aid (FAFSA) first, to see what they qualify for in financial aid. With the information from the FAFSA, the school can put together a financial aid package that may include grants and scholarships that your student doesn’t want to pass up.

Your student’s financial aid package will also show what he or she qualifies for in Federal Stafford Loans. The Federal Stafford Loan is one of the most affordable options for financing college today, with a fixed interest rate of 6.80%, so if you’re planning to borrow money for college, students should look to that loan first.

Assuming the Federal Stafford Loan does not cover all college expenses, there are three common choices to consider for financing to bridge the gap: the Federal PLUS Loan for parents, home equity financing, and private student loans.

Take a closer look at these options by reading this comparison chart.

Ultimately, you’ll want to choose the option that makes the most sense for your individual financial situation. It’s not a "one size fits all" approach. The financing that works for Nate and his daughter at the University of Mississippi may not work for you at all schools.

For example, maybe you don’t want to mess with the FAFSA and would like to bypass federal loans altogether, so you choose a home equity line of credit. Or maybe you don’t want to use the equity in your home for education because you know you’ll need a new roof soon, so you apply for a Federal PLUS Loan or cosign a private loan for your student.

Parents, tell us: When it comes to borrowing for education, what has worked best for you?




Student loan or home equity financing?
by Caroline,

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Home Equity Loan Facts

A home equity loan is a special type of loan 5ACthat is used by homeowners who wish to use their equity as collateral. It may be necessary for a family to obtain a home equity loan for things such as medical bills, college costs, or house repairs. In a nutshell, a home equity loan is basically a lien that is placed on the property. Obtaining a home equity loan requires the customer to have good credit, and they should be a low risk borrower. Home equity loans are divided into two types, and these are open end and close end. A home equity loan may also be referred to as being a second mortgage.


When compared to traditional mortgages, home equity loans tend to be shorter in length. In places like the US, homeowners may be able to deduct the interest the earn on their income taxes. With the closed end home equity loan, the homeowner will be given a set amount of money at the closing, and they will not be able to borrow any more money. The amount of money that they are given will be determined by their credit score, salary, and the value of the home. It is not uncommon for a homeowner to borrow 100 percent of the value of the house, and some lenders will go beyond 100 percent in a process that is called over equity.

Closed end home equity loans will often have rates that are fixed. In addition to this, the loan may be amortized for as long as 15 years. Once the term of the loan ends, the homeowner may need to pay what is called a balloon payment. To avoid the balloon 5ACpayment, the homeowner will need to either pay more than the minimum payment each month or refinance the home equity loan. The open end home equity loan may also be called a home equity line of credit. With this loan, the homeowner can decide when they want to borrow money against the equity of the home.

At first, the lender will set a limit on the credit line, and this limit will be dependent on many of the things that are used with closed end home equity loans. As with the closed end loan, it is possible for the homeowner to borrow 100% of the value of their home with open ended home equity loan. The length of these loans may be as long as 30 years. The interest rate for the home equity line of credit will be variable. The minimum payment that is made each month will be directly connected to the interest. The interest rate of both of these loans will typically be dependent on the prime rate.

Home equity loans have a number of powerful advantages, and they are utilized by millions of consumers. Many people encounter situations where they need large sums of money, and they money that they have may be tied up in investments. Home equity loans are a great way for them to pay for these large expenses.

Michael Colucci is a writer on Home2CB Equity Loan which is part of the Knowledge Search network.


Home Equity Loan Facts
by creditmanagementbpwve

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