When you’re looking for ways to help your child pay for college, don’t overlook one of your biggest assets: your house.
Your home can help pay for your child’s college in two ways: a home equity loan or a home equity line of credit. Both are solid options for covering the cost of college.
After all, you’ve been investing in your home for years. Why not put it to work for you?
What’s a Home Equity Loan?
A home equity loan is a loan based on — you guessed it — your home equity or how much you’ve paid on your home. For example, if you have a $150,000 home and have paid $50,000, your home equity is $50,000.
With a home equity loan, you get a lump sum of money at a fixed interest rate. The rate is typically lower than rates for other loan types because it’s secured by your house.
A home equity loan is a great option when you need a large amount of money. And whether you’re able to help your child or not, it’s certainly going to take a large amount of money to pay for college. According to the National Center for Education Statistics, the average yearly cost of a college education in Ohio was $20,931 at a public university. For a private school, it was $39,449.
A home equity loan can be an alternative to your child being one of the average undergraduates owing $17,900.
Home equity loans come at a lower interest rate than the other personal loans for college available to parents. For example, the average interest rate for home equity loans in the 2015-2016 school year was around 5%. Parent PLUS loans (a type of loan available through the federal of government)) had an average of 6.84%.
What’s a Home Equity Line of Credit?
A home equity line of credit, or HELOC, is a revolving line of credit against your home, using the equity you’ve accumulated as collateral for the loan.
The main difference between a home equity loan and a HELOC is that with a HELOC, you don’t get a lump sum of money. Rather, you have a maximum amount that you’re allowed to borrow over a set period. The great part is, you only pay interest on the amount that you’ve used.
A benefit of a Mercer Savings Bank HELOC is that your payments are made up of both principal and interest, so you’re repaying the borrowed amount faster than an interest-only line of credit.
However, keep in mind that it’s good to have more than 20% equity in your home before you start to look at a HELOC or a home equity loan as an option.
Minimize Your Risk
The main drawback of a home equity loan or HELOC is obvious: your house is the asset that’s securing the loan. Be sure you can afford both the mortgage and equity loan payments before you make your decision.
Start a conversation with your child as they near high school graduation. Work together to make sure they’re taking advantage of all their financial aid options. Discuss the option of your child taking out a low-interest federal student loan for tuition and fees while you take out a loan for their living expenses. That helps split the financial load in a manageable way for both of you.
And remember: student loans are a major financial responsibility, but they can pay off. According to a 2016 White House report, workers over the age of 25 with a bachelor’s degree earned about 70% more than workers with only a high school degree. They were also more likely to be employed.
If you’re interested in learning more about a home equity loan or a HELOC, feel free to contact us. We’re here to help you understand all your options. Call 877.672.4543 or visit your local branch to discuss the best fit for you.