<p>I'll be a senior next year, and my parents were considering buying another home (not moving) because of the economic crisis. By the time i enter college they project that theyll still be making mortgage payments on a new house if they choose to buy it.</p>
<p>How does this effect my efc at colleges, especially privates? We already own our first home, and my concern is that the increase in home equity can cripple my efc. Also, how would colleges acknowledge the mortgage my parents would still be paying, or do they not do this?</p>
<p>The equity in your parents’ second home will be listed as an asset on the FAFSA.</p>
<p>I’ll express an opinion here and it may be an unpopular post…but let me understand this… Your parents can AFFORD to purchase a second home?? But you are worried it will “cripple your EFC”? I guess your family thinks it’s ok to put THEIR money into a second home, and hope that someone else will finance your college education partially. I’m sorry, but I have difficulty with this.</p>
<p>No problem at all with anyone of any means who, within the rules of the system (i.e., no fraud or lying), can reduce their college expenses. </p>
<p>In this particular case, theres not enough info to say for sure. You should run the numbers on one of the institutional methodology EFC calculators. At a quick glance, it may have little effect in the near term. Whatever assets your parents currently have to put down on a 2nd home probably already counts as an asset anyway at Profile schools. And it gets complicated. Some schools cap home equity contributions, etc.</p>
<p>The equity in the home will be an asset. Equity in simple terms is the value of the home minus what is owed. The value is roughly what the home is worth - what it can be sold for - on the open market the day you fill in the FAFSA. For instance, if your parents bought a second home for $250,000, put zero down and took out a $250,000 mortgage and the home is only worth $250,000 then there is no equity, if they have made some payments between the time they purchased and the time you filled out the FAFSA and the housing marketing moved upward…then they might have alittle equity. If they buy the home and then rent it out then the home is generating some paper income which might make a small dent in the EFC. It all depends. Your parents can come up with a scenario or two and see what happens when they run some calculators. Chances are it won’t “cripple” your EFC or dramatically change it as goru mentions and if they use other cash assets that are reportable on the FAFSA and put the entire amount into the second home, then the second home has “equity” so your parents really have to run the numbers to see what the impact will be. I’m not saavy enough to know off the top of my head how transferring one asset to a different asset changes the FAFSA calculations.</p>
<p>I was wondering about this, too. The OP seems worried about paying for college, but the parents have the money/are willing to take out loans for a new home. I understand the question, but… hmm. Let’s put the new house at $250,000. Over the first four years (no money down), that’s $33,000 BEFORE taxes. That in itself is a significant number. Why not invest that $250,000 into the education of the kids? I totally get it if the OP’s parents are in it for themselves, but the OP should seriously considering speaking to his/her parents about that decision.</p>
<p>I don’t think it will impact your EFC all that much; it is just moving assets from one pocket to another. If property goes up a lot in the next few years to create some equity, it might raise your EFC by a small amount. If they don’t rent it out to get some income, it will actually reduce your EFC over time because the cost has to be covered from your assets, reducing your family’s wealth.</p>
<p>The bigger issue to me is cash flow. Your parents are taking on another mortgage, tax bill, insurance bill, utility bills, maintenance bills, etc. Unless your parents have significant other assets to pay these costs, or rental income to cover them, they have to come out of current income, and your EFC will not be lowered because of these expenses. Will your parents still be able to pay the EFC given this extra drain on their income from the second house?</p>
<p>Also, remember that your EFC doesn’t mean that’s all college will cost you. You might (probably will at private schools) get gapped or offered a lot of loans. The expenses from another house might mean you have to take more loans.</p>
<p>Regardless of what your EFC is, you need to have a serious conversation <em>now</em> about how much your parents will commit to contribute to your college education. Then make sure you apply to some schools you can afford in addition to your dream private schools.</p>
<p>
You need to broaden your world view a little bit and realize there is more to life than spending every penny you have on your kids’ education. There can be a lot of legitimate reasons for buying a second house - perhaps it is a opportunity to get a retirement house at prices that will never be this low again, or maybe it is an investment for tax purposes or estate planning or etc etc etc. Financial planning and wealth-building don’t get put on hold because your kid is going to college.</p>
<p>There is no hard info in the original post, so it is really very difficult to judge. If they are playing within the rules, I don’t see what your complaint is.</p>
<p>Sometimes buying a second home is a wise investment. I know folks who make a living buying homes and flipping them. A bit different from vacation homes. But even they can be a good source of income and investment.</p>
<p>Good luck getting a mortgage these days with NO money down…unless you have VERY substantial other assets and income (in which case college expenses shouldn’t be a problem). Banks typically require a larger down payment on second homes than on primary residences.</p>
<p>Like the other people who have posted I would encourage you to use one of the EFC calculators on the web to see what your EFC is. But prepare yourself, need based assistance is for people who are truly in need and the methodologies are designed to take into account any and all assets. We are a middle class family and we qualified for no need based assistance. I would be pretty surprised if your family qualifies for need based assistance given that you can afford a second home. That doesn’t mean your family can pay the full price for a private school, because I know that we can’t. It just means that the money will have to come from somewhere else.</p>
<p>OP, I want to commend you for asking these types of questions. While you may or may not understand all the ins and outs of assets vs. cash flow vs. “protected retirement income” etc. at least you are asking. I really think if you have not shared with your parents, and being a junior you may not have yet, any colleges you think you might want to look at NOW is a good time to do so. It is a good time to sit down with your parents and talk to them about financing your college education. None of us can tell you what your family financial situation is or the ramifications if they do one thing vs. another. no one here can predict if you will get aid or not get aid. No one can predict if you get merit scholarships or not get merit scholarships. Most parents would appreciate their kids initiating a discussion regarding college and it will serve you well in preparing a good list of colleges to apply to this fall if you have this discussion now. It is incredibly difficult for kids to assess what their parents’ financial situation is based only on what they see in their house, in their neighborhood or what their parents do for a living… even what gets discussed around the dinner table. Perception and reality can be different.</p>
<p>Basically, the second home is just another asset. Just as though they bought a stock or CD or anything else. It’s the first home that is exempted from being treated as such by FAFSA.</p>
<p>For those who are being critical of me, this is a hard decision for my parents since we are certainly not THAT rich and as mentioned above my father simply thinks that it is a wise investment. It is just an idea that was being tossed around the family.</p>
<p>so let me get this straight, if my parents just buy a house (and pay little to nothing) then the equity is essentially zero because they owe what its worth. and the reason someone would have negative equity is just because the value of their home decreases more than what they pay off their mortgage?</p>
<p>Now, i do have another question. how would the payments that my parents have to make on the house affect how schools see their income and/or assets? Would it be taken into consideration? </p>
<p>The reason i ask that is when i run it through the collegeboard estimator, nothing seems to decrease from if my parents didnt buy the house. The only change that seems to happen is the increase in home equity.</p>
<p>the schools do not take into account all of the expenses associated with owning a second home-- they don’t take into account the expenses associated with owning a first home, either. It’s just that the equity in the primary residence is usually not considered, while the equity in the second home is considered as available.</p>
<p>It would be more accurate to say that the schools do not take into account ANY expenses. Certainly the FAFSA does not ask for that info. The CSS Profile does ask for the amount of monthly mortgage payment, but I’m not sure how they use that info – it may just be one of those questions designed to get a better picture of the family’s overall economic picture.</p>
<p>You are correct in how you are interpreting home equity. With regard to your question about the monthly mortgage payments. Most schools only need the federal FAFSA when analyzing need based aid. As you may have figured out from using the calculators, the FAFSA does not ask specific questions about family debt and what that debt is comprised of like car payments, mortgage payments, credit card payments. If your family rents the second home then all those costs could have a slight impact, probably very slight positively or negatively on the adjusted gross income but in general more “weight” is given to the income streams (salaries, support payments, positive cash flow from investments, etc.) and in general the FAFSA does not have the level of detail for colleges to make more than broad generalizations about what a family is expected to contribute (EFC) because pockets of things are lumped together. For instance the question might be “What is the value of your assets” as opposed to “what are your indiviudal assets and what are their cash values if you sold them today”. Some schools require that future students fill in what is called the “Profile” which is not a federal form as you may have figured out. The profile looks at the individual income streams and the individual assets that families have…basically analyzes all the sorts of things that families could assess to generate money to pay the college. The CSS form is more detailed and will ask very specific questions about the financial picture. The schools that use CSS also sometimes have their own forms that need to be filled out so pay close attention to each college you apply to and read up on what forms need to be filled out and when they need to be filled out. These colleges for the most part also need the FAFSA. Colleges that use CSS use the information for their particular school. In general, again, the mortgage payments most likely will not be terribly impactful in a positive way and in general these schools will look at available cash as something that people have “choice” with. For example, you can choose to finance your car and make monthly payments, you can choose to buy real estate and use your cash to make mortgage payments, you can use your credit card to buy purchases and pay them off over time or you can use your cash to fund college/university expenses or you can use cash to fund your retirement. It is difficult to predict how they will view any individual family financial portrait. But again, you can get an idea or a starting point by using the calculator’s “institutional method.” From a parent to a student, the bottom line is your parents have to balance what they do with “today’s” dollars with their particular long-term financial picture and make a decision what is best to do with available financial resources. It is a very tough economic climate for parents and most need to ensure that their financial picture can sustain them into their senior years. The choice should not be funding your college education so that you can support them when they are 75 and their money runs out. The choice should be how best to do both…and I’m sure that is what is going on in their minds…how to give you the best education available and sustain them for many years to come. It’s tough on the kids and it’s tough on the parents. What I told my kids is to apply where they want to apply but absolutely understand that the end cost can impact the decision they are allowed to make and I gave them a $$ figure that their dad and I will pay each year. And finally, remember that all colleges and universities “package” their financial aid as a combination of what the family must pay, what the college will “pay” with grants and scholarships and what the student can take on as work/study or Stafford loans. The portion the family must pay (which will be your EFC or maybe more depending on the school) will be paid either from income streams the family already has or from loans that the parents will take out and pay back. No doubt, your parents will have feelings about loans, too, that you should talk about. Know, too, that if you receive scholarships from your community or from an organization colleges and universities can be different how they view this. Some schools will “decrease” the school’s aid dollars the amount you are “bringing to the table” and some will not. As an example, my son got a small scholarship the spring before he started college, when that was reported to his college they “took away” his work/study. When you get down to the wire, this is a very good question to ask your college choices “If I get xxx scholarship how will you account for this relative to my financial aid package.” Whew…that’s my financial aid 101 that we gave our kids! Asking questions is very good so keep asking if you still have questions.</p>
<p>trickysocks, the idea is just being tossed around now but I don’t think it will fly with nothing down unless you’re related to the sellers. Banks will generally not loan on 2nd homes without a significant percent down, typically 20-25%. Also, if paying that mortgage means there’s less income available to pay tuition - assuming they would need/take a payment plan or loan of some type - it could have a big impact on your college plans. Unless you KNOW you’ll be getting significant aid, now is the time that most parents would resist making extra commitments…at least until the college decision is made and the financial picture is clearly understood. </p>
<p>Please understand and firmly believe that your EFC under FAFSA/Profile often has very little correlation to the actual amount you will be expected to pay. It is more a test of your eligibility for limited financial aid resources that are available. For many, the actual “contribution” is several times higher than the EFC if they didn’t meet the specific criteria for each category of aid. If your folks can handle that, it might be a good investment. If not, it might mean you’re limited in your college choices and everyone is stressed out when tuition bills are due.</p>
<p>I bought with nothing down some years ago and with the market the way it is, sellers are even more eager to get rid of their homes. Just have the down payment built into the sale price. </p>
<p>For example, many years ago, I bought a house for $200K and got a$160K mortgage for it. At the time I only had $20K for the downpayment. I could not get a decent mortgage for less than 20% down then. So the seller and I actually agreed to a $180K price and I was given $20K at the closing which went for the down payment. THat can also be done for the entire downpayment. I have seen it done a lot here. Also, sellers are taking mortgages for bridge amounts if a bank won’t cough up the amount needed. To sell these days is taking some flexibility.</p>
<p>A second home is an asset bought just like anything else. It’s market value will be apprised accordingly. If it is worth nothing because of the mortage, no problem.</p>
<p>A question, do all of the deductions and depreciation numbers that go on the tax return regarding a second home that reduce your taxes also reduce FAFSA and PROFILE bottom line income? Something I never thought about as we do not have a second home.</p>
<p>It is my experience that the only place the deductions/depreciation/expense impact is the adjusted gross income on the FAFSA so if you had no other dividends/cap gains, etc. and you showed a paper loss on the second home it would decrease your AGI and conversely if you show a gain it increases your AGI. I know you report income and adjusted gross income on the FAFSA and I haven’t dug too deeply into the fomula to see what “they” do with each of those numbers. By the way, I do believe or I’ve been doing it wrong for many years, the only way to take depreciation, expenses, etc. is if you are renting the second home and utilizing the Supplemental Income forms…I think if you just have a second home it is just captured on Schedule A as an itemized deduction along with your first home taxes and all you can deduct are taxes. If I’m doing it wrong and there are any tax accountants out there let me know!!!</p>
<p>thanks everyone, so i have another question.</p>
<p>So from what momofthreeboys post stated, it appears as though on the CSS Profile would take mortgage payments more relative to the FAFSA.</p>
<p>Can anyone read this and tell me how many errors i make?</p>
<p>What my parents said they would plan to do is actually move to this house (its not that far away) and then rent the house we currently live in to people. So, i believe it was established that the money my parents obtain as rent would count as income. And as i stated earlier, it seems that the CSS Profile will take mortgage payments into account more than the FAFSA. So if the income from rent was equivalent to mortgage payments, then the net expense of the house (disregarding incidental expenses) would be zero. And in that case, it would not have an effect on my parents AGI. And so the main thing that could increase my EFC is when home equity increases because we make more and more payments. And so, give or take a little depending on what school it is, my institutional methodology EFC shouldnt change too much. But if the FAFSA doesnt consider mortgage payments as much, my federal methodology EFC could increase a lot? Or would it mainly remain fairly constant as well?</p>
<p>I say it in that terms because (with regards to a post that points out potential gapping in EFC) im only applying to schools that do require the Profile (except state flagship) and that cover all need, and from what ive seen seem to be pretty good about not gapping. My parents said we can probably afford our institutional methodology EFC as it stands now, so thats why im asking it in those terms.</p>
<p>Can anyone also tell me how a purchase like this would affect taxes? My dad told me that if they were to sell one of the houses a long time down the road then we could get lots of asset protection or something like that, but how does it vary from a current perspective?</p>