Home equity borrowing for college bills

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Q. What are the pros and cons of a home equity loan instead of a home equity line of credit? I’m thinking of using it for college tuition.
— Parent

A. Deciding the best place to take money to pay for college tuition is a hard decision that can stick with you for years after the student graduates.

You’re talking about taking funds from the value of your home to pay the tuition bills.

There are differences between a home equity loan and a home equity line of credit, or HELOC.

With a HELOC, the amount of the loan is basically your credit line and you draw on the credit line only when you need the money, said Sheri Iannetta Cupo, a certified financial planner with SageBroadview Financial Planning in Morristown.

The rate on a HELOC is variable.

“It is usually based on the Prime rate plus or minus a factor, therefore there is the risk that the rate will rise while you are paying back the loan thereby increasing your expected monthly payment,” Cupo said.

Your monthly payments for a HELOC cover interest only during the draw period.

“This provides flexibility, but we recommend you pay more than the monthly required payment so you don’t dig yourself into a hole,” she said.

A home equity loan, in comparison, comes with a fixed rate and you get the funds in a lump sum. You’d also be in a regular payment plan the repay the money.

“A home equity loan could jeopardize need-based financial aid as the money received from the home equity loan that is not yet used to pay for college will negatively impact the FAFSA,” she said.

With either kind of borrowing, your home is collateral for these loans. If you cannot pay your loan then you could lose your house, Cupo said.

And if the value of your home falls, she said, you could end up owing more than your home is worth.

“Interest is generally deductible when these loans are used for college unless you are subject to Alternative Minimum Tax (AMT). Then home equity interest is only deductible when used to improve your home,” she said. “Home equity indebtedness — as opposed to a mortgage used only to buy or build a home — is only deductible on amounts up to $100,000.”

So which is best for you? That depends on your situation. Consider meeting with a financial advisor who can go over your entire financial picture to help you make the most informed decision for your family.

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This post was first published in July 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.