Many homeowners use home equity loans or HELOCs for remodeling or renovations, but you can use them any way you’d like, including funding your child’s education. Learn more about how using home equity works and how you can use it to help pay for college expenses.
Can You Use a Home Equity Loan to Pay for College?
Home equity loans or HELOCs can be used to cover any expense you like, including costs associated with attending college. Like with any other loan, home equity loans and lines of credit you use need to be repaid. Because these financial products are secured by your home, if you default on the loan, your home could be foreclosed upon.
Pros and Cons of Using Home Equity to Fund College
Like any major financial move, there are both pros and cons worth considering when it comes to using your home equity for loans.
Pros Explained
Faster funding timelines: Typically, the process for getting home equity loans and HELOCs is faster than other borrowing options such as refinancing.Interest rates can be more favorable: The interest rates associated with home equity loans and HELOCs are generally lower than other loan options such as personal loans, which can save you money.Fixed interest rates: Home equity loans typically come with a fixed interest rate for the entire life of the loan, so your payments will remain consistent. This can help you plan your budget more easily. (HELOCs usually have adjustable rates.)
Cons Explained
Your house acts as collateral: Your home will be used as collateral for the loan, so if you default on payments, you could lose your home. Must pay off the loan before selling the home: You lose a bit of flexibility when you take out a home equity loan or HELOC. If you decide you want to sell your house, you need to pay off the loan or line of credit you used before you can finalize the sale. Can make mortgage payoff take longer: When you take out a home equity loan or HELOC, you increase the remaining balance on your mortgage which can make it take longer to pay off.
Other Ways to Pay for College
Using your home equity is not your only option for borrowing money to pay for college. Here are a few others you might consider.
Federal Student Loans
Federal student loans are funded by the federal government and usually have more favorable interest rates than private student loans. Federal student loans can be better choices than a home equity loan since these loans come with helpful protections such as income-driven repayment plans and deferment options.
Private Student Loans
Private student loans come from private lenders such as banks. In some cases, a home equity loan will have better interest rates than a private student loan, but if you need to borrow large loan amounts, having a private student loan that is not secured by your home may give you some peace of mind.
Personal Loans
Parents or students can take out personal loans for any reason, including to pay for education-related expenses. Whether or not a personal loan is a better fit than a home equity loan depends in part on the interest-rate repayment terms.
Cash-Out Refinance
When you increase the amount of your current mortgage during a cash-out refinance, you can gain access to the difference between the original loan amount and the new loan amount in cash. Keep in mind this strategy usually entails closing costs. If you can secure a lower interest rate, you could potentially save money on mortgage payments while gaining access to cash you can use to pay for college. In this way, a cash-out refinance may actually help you save money, whereas a home equity loan would not.
