Parents: Your Financing Options: Home Equity Loans & Lines of Credit

	Parent Resources
	•	File the FAFSA
	•	1-2-3 Approach
	•	Your Financing Options
		- Parent PLUS
		- Private Loans
		- Home Equity
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		- 401(k) or IRA
		- Consumer Loans
		- Liquidating
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		- Credit Cards
	•	Consolidation
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	•	Checklist
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Parent Resources for Education Preparation (PREP)^SM

Your Financing Options:
Home Equity Loans & Lines of Credit

Home equity loans and home equity lines of credit are borrowing options based on the amount of equity a homeowner has in his or her property. This amount is determined by taking the lender-assessed resale dollar value of the property and subtracting the outstanding mortgage owed.

A home equity loan is a lump sum loan similar to a mortgage. The amount borrowed is disbursed in its entirety and the borrower is required to make a standard payment each month for the duration of the loan.

A home equity line is revolving debt, similar to a credit card. This is an open-ended loan, and you may borrow up to the entire amount of equity. Due to the range of borrowing flexibility this loan offers, it does not have a specified repayment schedule, but may require a minimum payment to cover interest and contribute to paying off principal.

Parents contemplating taking a home equity loan to cover education costs should consider the following:

Interest rate. Most carry a monthly variable interest rate.
Fees. Vary, depending on terms of lender.
Credit eligibility. Required to pass a credit check.
Tax considerations. Interest paid is usually tax deductible, to a point. See your tax adviser for details.
Borrowing amount. Limited to the difference between your property’s fair market value less the amount you owe on your mortgage.
Borrowing for all your children. Many parents don't have enough equity in their homes to cover every child for all their years of college.
Borrowing for school-related expenses. May be used to finance expenses in excess of cost of attendance, such as a commuting vehicle, travel home, furniture, and appliances.
Deferment and forbearance clauses. None.
Repayment. Repayment will start as soon as borrowed funds are disbursed. You cannot postpone payment until your child graduates.
Repayment plan options. None.
Liquidity, emergencies, and other expenses. Once you use all the equity in your home to secure borrowed funds, you cannot borrow additional funds for other needs using your home as collateral.

Pros
•	Home equity leverage may provide a large amount of cash at a relatively low interest rate, as well as tax advantages. (Check with your tax adviser for details.)
•	You may be able to borrow up to 85% of the appraised value of your home minus the amount you owe on your first mortgage.

Cons
•	You may put your home at risk if you are late with or cannot make your monthly payments.
•	There are closing costs associated with a home equity loan.
•	Using home equity to pay for college eliminates it as an option to pay for other needs.

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