<p>In a magazine I have, it says "A home equity line of credit can enchance your chances for financial aid, whereas a second mortgage can hurt them, depending on whether the school counts home equity as an asset." So I called my school's financial aid office (which uses both FAFSA and CSS), and they actually said the opposite: that the home equity line of credit would be just like credit card debt and therefore not improve the financial aid, whereas the home equity loan would subtract from my family's home equity and therefore improve the financial aid.</p>
<p>So did the magazine make a typo or something?</p>
<p>For FAFSA home equity is not taken into account at all in the EFC calculation so on the face of it the 2nd mortgage would have no affect on financial aid. But if you take a second mortgage out for, say, $100,000 and you have that $100,000 sitting somewhere as an asset (bank account, CD whatever) when you file FAFSA then that $100,000 is no longer a protected asset so will be included in the EFC calculation increasing your EFC by @ $5,600. There have been posts on CC by people who have taken out 2nd mortgages to pay for a new roof/kitchen/bathroom/furnace but have timed it badly by taking the 2nd mortgage in January and having the money sitting in the bank when they file FAFSA. Even though the money was borrowed and is earmarked for those home improvements FAFSA regards the money as an available asset for the EFC. In this scenario - borrow the money after filing FAFSA or pay for the home improvements before filing FAFSA.</p>
<p>If you have a home equity line of credit the money is available to you but is still invested in your house so does not affect your FAFSA EFC. If you tap into the line of credit only when you need the money to pay for whatever you are paying for then the cash will not be sitting in your bank as an unprotected asset at the time you file FAFSA. </p>
<p>For profile it may work slightly differently depending on how they treat your equity in their calculation. If they consider your home equity an available asset then yes reducing the equity would make sense as long as the money is not sitting elsewhere equally available. The school fails to address the question of where the money from the 2nd mortgage is sitting. Also I believe money borrowed through a home equity line of credit reduces your equity in the same way a mortgage does. It is not like credit card debt at all. (but I am not a expert so check that out).</p>
<p>So no the magazine did not make a typo - maybe they needed a more in depth explanation.</p>