pay down mortgage and use HELOC?

<p>My S is a jr in hs. I am pretty sure he is going to go to a CSS school. I have been saving for his schooling since he was a little kid, and have some money in 529s. I also have some money invested in mutual funds. I am fairly certain that these assets would be assessed at 5.6%. My feeling is that with the way the markets are right now, 10% would be a great year, but 7% is more realistic. After taxes, this would put me about even with the 5.6% CSS asset assessment. I have no other non-retirement assets except my house. My income is such that I could get about a $25 - $30K EFC from a CSS school, a lot of which could be paid by the 529s.</p>

<p>It is my understanding that CSS schools do not look at equity in your house as an asset. I know that is the case for sure with one school we are very interested in. I am thinking of selling the mutual funds and paying down my mortgage. This is not a bad thing to do necessarily anyway. I can get a HELOC if I were ever to need additional funds. This would effectively shield the mutual funds from CSS EFC. What do others think of this strategy?</p>

<ol>
<li>I’d never get rid of a reasonable emergency fund if I had the choice. (Say, three months of income.) FAFSA uses an asset protection allowance that is age-based; if the older parent (of a married couple) is 55, the formula will ignore the first $53400 of assets.) Profile handles it differently.</li>
<li>Some CSS schools do not look at home equity at all. Some cap it at 1 or 1.2 times your family income. Some include more. It varies, a lot. (FAFSA ignores it.) Look at the school’s website or ask the school directly – it is an important question. </li>
<li>If you paid down your mortgage, would it reduce/eliminate your monthly mortgage payment? It is very clear that if someone has a $400/month car payment, with a balance of $18,000 on the car loan, that paying off that car loan with savings would give you $4800 a year more in flexibility on coping with college expenses. But putting the same $18K into prepayment of a fixed rate mortgage that will continue to have a $2650 monthly payment won’t be nearly as helpful.</li>
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<p>I would keep some money around for emergencies, but I would have the HELOC for that as well. You did point out a benefit that I had not thought of, in that my cash flow wil increase because my mortgage payment will go down. So do you think this makes sense?</p>

<p>It’s not a simple decision most of the time. It all depends on how your financial situation is. Giving financial advice without the whole picture is not a good idea since there are always a number of situations that are exceptions to even the most integral rules. Also the schools vary so greatly in the way they give financial aid.</p>

<p>PROFILE schools tend to include the value of your house as part of your assets. There is a list on this board that gives some examples of what a number of popular schools will use as formulas in terms of home equity. But info like that is a moving target, so setting your sights on it is risky. Also, your DS may want to go to a whole other school than the one to which you are tailoring your asset configurations. </p>

<p>If it looks like you can pay off some or all of your mortgage and still not have home equity be a sizeable asset in your financial profile, and if you don’t have other unsecured debt that the aid calculators are not even going to acknowledge, that might be a good move. Yes, it will give you more income in terms of reduced mortgage which means you can pay more of the cost of college out of current pay. Even with the reduction in tax breaks with less mortgage interest. It also gives you an additional (most likely lower interest cost) deductible loan source for yourself, if you do need to come up with more money. </p>

<p>But do bear in mind, that many of us dispensing this advice are just parents, and this is just an internet message board, great as it may be. Taking this as gospel in the world of financial advice can be dangerous. There is so much involved in doing these things. I have a friend who paid down her mortgage after getting a small windfall and scraping together some other funds and was so proud of the fact, only to get her HELOC closed down due to the way the market was operating. Now she has no source for those loans and she tied a huge portion of her money in her home. Scary. DH and I immediately borrowed a huge amount from our credit line which was very low interest when this happened as the bank was the same one we were using. When home values plummeted a few years ago, this sort of thing happened a lot.</p>

<p>Borrowing PLUS means a big whack in terms of interest rates as they are high. But it also keeps school and home finances separate. For some situations it is smarter to do so, and look at the cost of the interest rates as the insurance this provides. It can keep home equity lines to be available for other things, such as even paying off those PLUS balances in the future. You can only borrow PLUS while your kid is in school, so those loans are limited time offers. Sometimes flexibility can be important.</p>