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Using Your Home Equity

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Investing in your home is a possible alternative to other college savings vehicles. When it comes time to pay college bills, you can tap the equity in your home by getting a home equity line of credit.

There are several possible methods of investing in your home:

  • Make an extra month's payment every year, directing the lender to apply the payment to principal.
  • Using the amounts you would otherwise have saved in a college fund to prepay the mortgage periodically.
  • Getting a 15-year mortgage instead of a 30-year mortgage. This has an extra benefit that the fixed rates on 15 year mortgages are often lower than those on 30-year mortgages.

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If you're the type of person who is likely to spend any money in your checking or savings account, investing in your home may be a good alternative, because making a higher monthly payment forces you to save.

An added benefit of a 15-year mortgage is that by the time your children are ready for college, you will have paid off your mortgage. You can then redirect the amount of your housing payment to covering their college expenses.

Using a home equity line of credit has the following advantages:

  • Prepaying your mortgage or getting a shorter-term loan means more of your money is going to principal. This means that you'll be spending less money on interest over the lifetime of the loan. For example, if you're earning 1% after taxes on your investments, but paying 7% interest on your mortgage, using the investments to prepay the mortgage will save you 6%.
  • The net market value of your primary residence is ignored by the federal need analysis formula.
  • The proceeds of a home equity line of credit does not count as income. (Note that you want a line of credit and not a loan, so that the loan proceeds don't count as an asset.)
  • Interest on a home equity line of credit is often fully tax deductible, unlike student loan interest, which allows a deduction of up to $2,500 a year in interest paid.

There are, however, a few disadvantages:

  • The interest rate on a home equity line of credit is usually higher than the rates on federal education loans, but lower than the rates on most private education loans.
  • If most of your money is tied up in your house, your investments are not diversified. Don't forget that by investing in your home, you are making a big investment in real estate.
  • The net market value of the primary residence is considered in the institutional need analysis formula used by many private colleges.

 

 
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