Can a home equity loan be used for college tuition?
Paying for college is no easy feat these days. Thankfully, there are many ways to finance higher education.
While you may qualify for federal student aid, there might be some other options available to you. One of those potential options for qualified homeowners is taking out a home equity loan.
What is a home equity loan?
Home equity loans are offered in many formats, which makes them flexible borrowing tools.
A home equity loan is a borrowing tool homeowners can use to turn the value of their home into cash to pay for things like a college education.
As you might already know, the longer you own your home and pay your mortgage, the more the cash value of your home increases. That cash value is known as equity.
Basically, your home equity is the fair market value of your home minus all mortgages against the property.
For example, if your home is worth $350,000 and your current mortgage is $305,000, then you may be able to leverage up to $45,000 of equity using a home equity loan.
However, depending on your lender, you may typically be able to borrow up to 90% of your total home equity minus the value of the loan. If your total home equity value is $45,000, that means you might be able to take out a home equity loan for up to $40,500 to pay for college.
Home equity loans are offered in many formats, which makes them flexible borrowing tools that you can tailor to your needs.
Traditionally, home equity loans are offered in one of three ways.
- Home equity loan. This is a loan that becomes a second mortgage on your house and typically carries a fixed interest rate.
- Home equity line of credit (HELOC). This is a type of home equity loan that allows you to only borrow funds when you need them, and you only pay interest on the funds you borrow.
- Cash-out refinance. This loan allows you to increase the amount of your current mortgage by refinancing your existing mortgage into a larger one, giving you the difference in cash.
All of these are options that you may be able to take advantage of to finance a college education.
Using a home equity loan for college tuition
While some students use Stafford Loans to pay for college, they offer limited funding. The maximum loan amount depends on whether the loan is subsidized or unsubsidized and changes depending on enrollment grade level.
Considering average tuition costs, you can understand why students might need additional loan options to pay for college.
You can look at additional government funding through the Direct PLUS Program or a private student loan from a lending company. You can also turn to your home equity.
If you are a qualified homeowner, or if you are a parent paying for your adult child’s education and you own a home, you might be able to use the funds you’ve built up in your home for this major life expense.
With a home equity loan, the only cap on borrowing is the equity you have available. Where you might need a federal loan, a personal loan and a private student loan to cover college expenses, you might only need a single home equity loan to cover the same amount. This is just one of the many advantages to using a home equity loan to pay for college.
Home equity loans from Discover® Home Loans offer competitive fixed rates that depend on your creditworthiness and whether you are taking out a first or second mortgage loan.
Are there risks that come with using a home equity loan to pay for college?
All loans carry some type of risk if you fail to repay them. However, a home equity loan is unique in that your home secures the debt, which means your home is at risk if you fail to repay the loan.
For this reason, it is always essential to be sure that you can pay back the equity you borrow before you borrow from a lender. By taking out a home equity loan to pay for college, you are putting your home on the line for your education.
However, a home equity loan is an installment loan with a fixed monthly payment, so you know what you’ll pay every month. A home equity loan with Discover offers terms of 10, 15, 20 or 30 years to help you choose a term and payment that fits your budget.
You may also find that some private colleges consider the net market value of your primary residence when doing their financial aid analysis, which may cause them to award you less money and inspiring you to consider a home equity loan more seriously.
Because the value of your home depends largely on the condition of your local real estate market, you risk becoming “upside down” on your home if the market drops.
Being “upside down” on your home means you owe more money on your home than the home is worth. If the real estate market in your area isn’t healthy, this might be a valid concern to keep in mind.
If I want to consider a home equity loan, what should I do?
The first thing you should do if you are considering a home equity loan to pay for higher education is to make sure you qualify.
Most applicants for home equity loans with Discover must be able to demonstrate they qualify by having:
- A credit score of 620 or higher
- Verifiable employment and income sources
- Sufficient home equity
- A solid credit history
But one of the best ways to decide if a home equity loan is right for you is to speak with a Personal Banker from Discover at 1-855-361-3435. Or you can request a no-obligation quote and one of our Personal Bankers will call you back.
Whatever the case, you have several options when it comes to financing your higher education. It’s just a matter of deciding what works best for your personal and financial goals.
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