You were JUST dropping them off for the first day, and grabbing the camera to capture the first bike ride, and now, dorm rooms and tuition are right around the corner. Sigh. For many parents, after nostalgia, another feeling kicks in – one of shock and dread at those college or private school costs. A few thousand here, a few thousand there – it all adds up. In fact, recent estimates put the average cost for college tuition and fees at almost $10,000 a year for state residents at public colleges, and about $33,000 at private colleges.
So what’s a parent to do? Certainly education loans are a good, relatively low-interest option, but if you have some equity built up in your home, then you may want to explore a home equity line of credit, or HELOC, as well.
What is a HELOC?
A HELOC is a loan that is underwritten using your current home’s value. For example, if you’ve owned your home for 10 or so years, then you likely have a significant amount of equity, or money, invested in it. A HELOC essentially serves as a sort-of second mortgage, so the bank would give you a maximum loan amount for you to use based on the equity that you have in your home.
Going back to our 10-year ownership example, that maximum amount could be, say $40,000. Here’s how a HELOCs different than other loans…with a standard mortgage or loan, you’d be paid out an entire amount at closing. With a HELOC, a maximum amount is established based on your qualifications, credit history and needs, and then you may use as much, or as little, of that amount as you like. Unlike most other loans, the timing of accessing some, or all, of the funds is at your discretion. You could “draw” $3,000 for tuition this semester, then not use the line again until it’s time to pay next semester’s bill.
HELOCs have a “draw period,” typically ranging from 5 to 10 years, during which time borrowers can access the funds. During the draw period, the borrower is only required to pay interest on those funds that they actually drew out and used. After the draw period closes, borrowers are required to pay off the HELOC, or refinance it to another loan, during the repayment period. Repayment periods typically range from 10-20 years.
What’s the advantage of using a HELOC?
HELOCs are beneficial because you’re only paying interest on the funds you actually use, so if you’re not sure how much money you’ll need to for the school year, then a HELOC can be a good option.
As with any loan, you’ll want to talk to a financial expert and be confident you can pay off the HELOC before establishing one. Remember, ultimately the goal of homeownership is to own your house free and clear, so if you’re unsure as to whether you can handle additional payments after the draw period, then you may want to explore other avenues of funding, or look at adjusting your existing budget.
Talk to your neighborhood loan officer to find out if a HELOC might be right for you and your project. (Just like other loans, all HELOCs are subject to credit approval.)