Quick and Easy Home Equity Lines of Credit or Fixed Rate 2nd Loans

Student Loan vs. Home Equity Loan Deduction

 

Should my child get a student loan or should I get a Home Equity Loan?
Some parents joke about taking out a second mortgage to pay for the children's college education.

Others actually do it.

Low interest rates have families wondering if tapping home equity to pay for tuition is a good idea. About 5% of the money borrowed through home-equity lines of credit in recent years has been used for education, the Consumer Bankers Association reports.

"Education is a small percentage (of why homeowners tap into lines of credit), but that is growing as parents are finding that college expenses have gone sky high and the federal student-loan programs are not covering those costs," says Krayton Davis of nBuy Associates in Richmond, Va., 

Consider this. If you sell investments to pay for education, you may lose out on returns that are often higher than the after-tax cost of home equity borrowing. The profits may be further diminished by any capital gains tax you may have to pay. Take the time to determine the real cost to you of selling those investments.

Home equity financing also has advantages over borrowing from or liquidating retirement funds. Loans against retirement funds may have higher interest rates, making borrowing from them more expensive than home equity financing. Also, if you are considering liquidating a retirement fund, think again. After paying taxes and penalties you'll get little return on your dollar. Think of the long-term costs. 

Comparably low interest rates are available, she says, in the form of a federal PLUS loan (Parent Loan for Undergraduate Students). The interest rate for this year is 4.17%.

While some variable rates for home-equity loans may be slightly lower, Schutz says, the advantage of the PLUS loan is that once a student starts to make payments, the loan can be consolidated at a fixed rate; currently it would be rounded up to 2.875%. Most fixed rates for home-equity loans are higher, she says.

On a range of student loans, monthly payments are deferred until six months after college graduation. But for PLUS loans, parents generally have to start repayment as soon as all of the tuition for the year is disbursed to the school, which typically happens by the beginning of the second semester. That hasn't deterred parents, though.

As for tax considerations, $2,500 in education-loan interest can be deducted if you fall within certain income limits, says John Sestina, a financial planner in Columbus, Ohio. Interest on home equity loans, on the other hand, is supposed to be deducted only if it's used to improve the house. (In practice, he and other experts say, it's often written off regardless of how the money is spent.)

Should I consolidate my student loans with a Home Equity loan?

Consolidating loans generally makes sense if it lowers the rate or improves the deductibility and sometimes just to make administration easier. If you're financially disciplined and you can achieve one or both of these its generally a good idea.  Please review options at Student Loan Consolidator as well.  Lastly, be mindful of the fixed/variable rate trade-off. 

One benefit of moving the student debt over to a HELOC is that you gain significant flexibility. For instance, you can easily move debt in and out of a HELOC to take advantage of 0% credit card balance transfer offers. You need to be cautious and alert with this strategy, as it may lower your credit scores if you do not pay down debt, but it can significantly lower your interest costs.

And readers should bear in mind that defaulting on a mortgage (1st, 2nd or HELOC) can mean losing your home, student loans are a bit less scary in this regard. So, will you still have an emergency fund? If not, the HELOC is your prime emergency fund and spending that down to pay off loans can be risky. 

Also, be careful that you don't trade a student loan with say 5 years to go for an interest only equity line with 15 years or more to maturity. If you do you may find yourself paying off student loan debt while you're in retirement.

 

Home Equity Loans

We can do these loans within 14 days with all documentation. It is not unusual for 7 day closings after receiving all of your documents. 

 

Benefits:

Home Equity Loans are flexible and affordable. Whether you are looking to consolidate debts, finance home improvements and/or major purchases, or simply looking for ways to secure emergency capital, we have products that can help which includes:

• A true Stated Income Program up to 100% financing¹
• Competitive rates
• NO closing costs up to $1,000,000²
• NO application fees
• NO initial draw requirements
• Convenient document signing
• Potential tax deductibility - please consult tax advisor for more detail

• Purchase Money Seconds for Loans and Lines of Credit