Home equity is used to cover many types of expenses, including college. Discover the pros & cons of a home equity loan along with how to use one for college.
A college education can be invaluable for career prospects. But, as the price of higher education rises, many families are trying to find sufficient ways to cover the costs.
The good news is, the solution may not be too far from home—a home equity loan can be used for college tuition and can buffer major expenses when financial aid and student loans fail to offer much support.
If you’re unsure of where to start, this guide will cover everything you need to know about acquiring and using a home equity loan for college tuition. Plus, this will also cover other home equity loan alternative solutions you can use.
How Does a Home Equity Loan Work for College?
To determine if this is your best financial solution, it’s essential to know how a home equity loan works. A home equity loan, which is also known as a second mortgage, is a fixed interest rate loan that’s granted to homeowners by a lender.
Essentially, you can use your home equity for college costs. The loan can convert 80-85% of your home equity into cash, which you can then use for any major expenses you may have including college expenses or even for debt consolidation. You can even use a home equity loan to buy a car. However, you must start paying back the loan immediately.
The amount you receive is based on the current market value of your home and your current mortgage balance, in addition to the following factors:
- Your credit history
- Your job history
- Your annual income
With a home equity loan, your home is put up as collateral, which can make this option risky if you’re unable to cover expenses. That’s why it’s important to explore other options and see what will work for you financially.
How to Use a Home Equity Loan for College Tuition
A home equity loan can help pay for college tuition, from books to boarding. If you’re unsure of where to begin or what lenders look for in applicants, take a look at the steps required to secure a home equity loan:
- Step 1 – Know what lenders are looking for. Again, a lender will be looking at a few factors, such as credit score, income, home value. Additionally, you should have at least 20% equity in your home.
- Step 2 – Evaluate the costs. Once your home is appraised, you’ll be able to determine how much you’ll receive. Since you can only receive up to 80-85% of your home’s equity, that will be the amount that you’ll be able to borrow.
- Step 3 – Calculate your debt-to-income ratio. A lender will also be looking to see if you are a financially sound candidate to take on additional debt.
- Step 4 – Finally, determine if your credit score is strong enough. To qualify for a home equity loan, your credit score should be 620 or higher. If you’re trying to get a home equity loan with bad credit, you may find yourself with a denied home equity loan application.
Once you have a deeper understanding of the process, it can be beneficial to consider the advantages and disadvantages of using home equity for college expenses.
Home Equity Loan Advantages
When you’re nervous about taking out a student loan, a home equity loan for college tuition may be a helpful tool. But, before you start the application process, which can be as complex as applying for a mortgage, it’s essential to know how viable an option this is for your situation.
When you apply for a home equity loan, here are some of the benefits:
- A home equity loan has a fixed interest rate, so you always know your monthly cost.
- You get instant access to the money you need.
- You can extend your term anywhere from 5 to 15 years to make it more affordable.
Home Equity Loan Disadvantages
With the good comes a few downsides. To that end, here are some disadvantages of a home equity loan:
- With your house as collateral, you would be risking foreclosure.
- If your home value isn’t high enough, you may not have enough money to fully cover tuition.
- In addition to your first mortgage, you’ll also be required to pay off a second mortgage.
- If you move and sell the house, you would have to repay the loan in full.
Now that you’ve weighed the pros and cons of home equity loans, you may be wondering if there are better options?
Alternatives to a Home Equity Loan for College
One possible alternative to a home equity loan is a home equity line of credit, or HELOC. While home equity loans and home equity lines of credit may seem interchangeable, there are key differences that separate the two. So what’s the difference between a home equity loan vs. HELOC?
- Interest rate – A home equity can have a higher interest rate compared to a HELOC. It’s important to note that a home equity loan is fixed while a HELOC interest rate is flexible and can sometimes be higher.
- Repayment – With a HELOC, you won’t have to repay the loan during the first ten years, which is referred to as your draw period. On the other hand, a home equity loan requires immediate repayment.
Additionally, you can also partner with a company that offers sale-leaseback programs. These types of programs allow homeowners to sell their houses to the company, convert their equity to cash, and remain in the house as a renter. The cash can then be used toward the cost of tuition.
Sale-Leaseback: The Financial Solution for Tuition
If you’re wondering, “can a home equity loan be used for college?” The answer is yes. However, there are additional financial solutions that can help you convert your equity to cash without the financial risk.
When the risks of a home equity loan are too high, consider exploring an alternative solution with a sale-leaseback program.
A sale-leaseback solution is not a loan. So, when you convert your home equity into cash, you won’t have to stress about repayments or your home being foreclosed. Instead, you can focus on building a successful foundation for you and your family’s glowing future without the worry of moving out.
Home equity is used to cover many types of expenses, including college. Discover the pros & cons of a home equity loan along with how to use one for college. If you are still unsure of alternative options to securing this specific loan after reading this article, consult a financial advisor to discuss your options.
- Investopedia. A Guide for Home Equity Loans and HELOCs. https://www.investopedia.com/mortgage/heloc/
- Nerd Wallet. How a Home Equity Loan Works. https://www.nerdwallet.com/article/mortgages/home-equity-loan