I’m asking for a friend. I think I know the answer to this, but so many of y’all are well-versed in this area so I wanted to get your opinions.
Friend could have her house paid off in 2018. Their dd will be a college freshman in fall 2018 with a second child graduating HS a year later.
The wife was out of work for several months, which has left them really cash-poor right now. As a result, they are thinking about refinancing to lower their monthly payments, maybe take some cash and extend their house payment for 10 years.
In terms of financial aid, is that a good idea or a terrible idea? I don’t know the exact numbers, but they pay about $1,200 a month for their mortgage and must have hundreds of thousands in equity.
TIA
In most cases, it won’t matter. FAFSA doesn’t care about the equity or debt on a primary residence. CSS schools may, but there is an allowance for the primary residence, usually several times the income of the family.
True, but then wouldn’t paying off a home and being cash poor be better? Too much cash is assets used against you. Of course, in the OPs statement of the situation, how “cash poor” is it going to make them. One still needs cash to survive and in case of emergencies.
Also, it all depends on the school and how they meet your need (if they even do). Going to a school where they are going to offer you a ton of loans isn’t really in my opinion “aid”. If I’m going to have to pay it anyway, I’d rather pay it now (if I can) without interest. Going to a school where they give you grants is “free money” and would be worth it. But then again, this kind of school will probably use the CSS profile and take into account equity of the home.
The top priority may be to keep enough cash on hand for immediate needs. If you do have a constant and sufficient cash flow, you may pay off the house to lower your cash asset on hand for better EFC in FAFSA. But in reality, you may still need the money to pay for the college education expenses at the end unless your kids go to need met schools with substantial aids.
For the most part a low FAFSA will only get some subsidized loans and, potentially, a Pell Grant. If the family is such low income they qualify for Pell then IMO it would be better for them to hang onto the cash.
To clarify, I think their income normally is good so they won’t qualify for much FA when the time comes, but she’s freelance and her biggest, most reliable client dried up several months ago so she was without any income during that time. I think the main problem is that the kids are involved in some high-dollar, high-level activities (think premier soccer for one, expensive instrument/camps for another) that they usually can afford but are now causing temporary financial stress. Additionally, the new client doesn’t pay until 60 days after delivery. They just aren’t liquid right now.
I will let her know about the cash assets being more of an issue. I don’t know how much cash they were looking to pull out of the house. The older child will surely be a NMSF so will have good options regardless.
Is it possible for them just to take a Home Equity loan so they can have some cash in the near term but still get the main house mortgage paid off in 3 years? It seems a shame to make a long-term fix to what they must hope is a short-term problem.
They should pick a couple of colleges and universities that they think their kids might be interested in, and run the Net Price Calculators at each of them using several different scenarios. My guess is that they will be shocked at the huge yawning gap between what the college/university expects them to pay, and what they really can pay. In which case, concentrating on getting rid of that mortgage so that they have money to pay for college at college-going time, even if belts need to be tightened right now, probably makes good sense.
Home Equity Line of Credit could solve the problem. Pay off the house, but have the LOC available for cash flow only on an as-needed basis. That way, they only take the cash they need, when they need it, but don’t have cash sitting around available.
I wonder if there’s a reason they aren’t considering it. Seems to me to be the best solution.