<p>My D is a sophomore in HS. Does it make any sense, from a financial aid standpoint, to pay down (or completely pay off) the mortgage on our home with funds from our savings? She is interested in private LACs, and I'm thinking all or most will use the CSS/PROFILE or their own forms.</p>
<p>A couple of years ago I was sure that we wouldn't qualify for financial aid, but now with older son in college, plus our investments having taken a big hit, we just might.</p>
<p>Home equity is considered an asset just like cash for Profile. So shifting from savings to home equity (by paying down the mortgage) is no advantage, generally speaking. Some A-list privates cap home equity, so there might be some marginal advantage at a select number of those schools. You just have to research it to know which ones.</p>
<p>Home equity is off the radar for FAFSA. FAFSA is going to be relevant to you if you think you will be in Pell Grant territory, or need lots of government loans. Your EFC has to be pretty low to get a Pell Grant, and even then it is not that much.</p>
<p>One thing about a mortgage that you have had a while is that, through the magic of amortization, you have already prepaid most of the interest, and all you have left to pay is principal, so you might as well take advantage of the remainder of the term. If you pay it off after you are well into it, the effective interest rate over the life of the loan is much higher. The banks are counting on people to get tired of payments and pay off early, to stick it to the borrowers one last time.</p>
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One thing about a mortgage that you have had a while is that, through the magic of amortization, you have already prepaid most of the interest, and all you have left to pay is principal, so you might as well take advantage of the remainder of the term. If you pay it off after you are well into it, the effective interest rate over the life of the loan is much higher. The banks are counting on people to get tired of payments and pay off early, to stick it to the borrowers one last time.
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The above is completely untrue. </p>
<p>More to the point, some schools, such as Princeton, do not consider home equity. I'd suggest going to the websites of the schools that interest your D to see their specific policies.</p>
<p>Good luck.</p>
<p>It is true. Check out a sample amortization table at Mortgage</a> Calculators: Amortization Tables, Loan Balance, Interest And Principal. Just pick the already filled-in numbers and click. You'll see that in a 30 year fixed rate loan, after 10 years you have paid off 17% of the principal, after 20 years, 47% of the principal, so in the last 10 years (out of 30) you pay off well over half the principal. Year by year, if you pay off early, you end up losing more and more of the benefit of the prepaid interest built into the schedule. It would rarely make sense to pay off a 25 year old mortgage. I did mine, just because I was really sick of the payments and could do it.</p>
<p>(If it is not true, it is a common misunderstanding among the rabble I associate with, and I am ready to learn the truth. I have always felt like a fool for paying off my mortgage.)</p>
<p>Maybe it is not true the banks do this to shaft the borrowers, but whatever genius came up with the amortization formula did not do it to make it fair to the borrowers.</p>
<p>One pays more interest in the early years of a loan because they are are paying interest on a higher balance; conversely, one pays less interest (and thus more principal) in later years as the balance on which interest is charged decreases.</p>
<p>There is no prepaid interest on an amortizing loan. That concept may be the source of your confusion.</p>
<p>You do not prepay interest on a mortgage at all. You are paying more interest at the beginning of the mortgage term because you owe more money on the principal of the loan at the beginning so of course the interest is going to be higher. For instance in the example on your link the 1st year the loan start off at $100,000. the mortgage is held for 11 months of 2009 - 11 months interest on $100,000 is @$6,390. So at the end of 11 months you have made $7318 in payments - $6390 have gone to interest that you owe for the year, so only $928 goes to the principal. This is because you owed interest on $100k the 1st year - not because you are paying interest in advance. In the 2nd year you start off owing a little less, $99,072 (the original $100,000 less the $928 principal you paid in year 1). So your interest for year 2 is 7% of what you owe - $99,072 - @$6970. So in year 2 a little less of your mortgage payment goes toward the interest, because you *owe *less interest, and a little more to the principal. </p>
<p>There is no prepaid interest being charged. Just interest each year on the amount of money you still owe. All amortization tables do is calculate a way of paying the mortgage off in equal installments over a period of years.</p>
<p>To the OPs question. It is difficult to say really. For FAFSA you are certainly better off with the money in your house where it is not a reportable asset rather than in a savings account where it is reportable. From what I understand CSSprofile schools have different ways of using the house equity information. Some may not use it at all. Some cap the house value at a % of income. Some do not. Without knowing exactly how a particular school treats it, it is impossible to know if paying the mortgage down would be beneficial. But it if is an option financially, I don't see how it could hurt.</p>
<p>I would also make sure that a line of credit is available on the home, just in case aid isn't forthcoming and you need to access those savings/equity! In my area people are having a very hard time getting mortgages and HELOCs right now, although you have some time before your D starts school.</p>
<p>Thanks for the replies. We don't have a very large balance left on the mortgage at this time, but the interest rate is higher than what we're currently earning in the market, so I thought paying it off might make sense that way too. </p>
<p>As far as financial aid goes, I went to Collegeboard and calculated it both ways. For the FM, it makes a little difference, and for the IM it really doesn't make any difference at all. I did email a couple of schools to ask if they use home equity in their calculation of parental contribution. We'll see what they say - my guess is they do use it.</p>
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<p>Well, that's a different issue. Paying off a high-interest mortgage does strike me as a sensible investment right now, if you can swing it. It will free up cash to invest, hopefully at higher rates of return, when market conditions improve, and you'll have a nice fully paid-off asset in your house which may make it marginally easier to get a nice HELOC when the credit market eases, especially if housing prices firm up. But it probably won't make any difference in FA at most schools that use PROFILE.</p>
<p>To quote Michelle Singletary, one of the Financial Columnists at the Washington Post:
Debt = Slavery</p>
<p>Pay off the mortgage if you can, and enjoy being debt-free for at least a fraction of your lifetime!</p>
<p>I saw your post early this morning, but then I hd to run errands and forgot to post this. I also ran some numbers through the EFC calculator to see if it would make a difference and found none. However, I also saw that for the institutional methodology they assessed home equity the same as other assets (12%) My son's school assesses home equity at about 5%. I also think I recall someone posting something a while back saying that the 5% number is typical. </p>
<p>I hope you get responses to your emails to the schools, but when I tried I got answers like "yes we consider home equity", but nothing definative. I think that if a school caps home equity as a percentage of income they will probably be more forthcoming. </p>
<p>FYI, I happen to be one of those people with a tiny mortgage, minimal liquid assets and a huge HELOC for emergencies and tuition payments if necessary. SO far it has worked out well.</p>
<p>Paying off your mortgage does help for financial aid purposes. Home Equity is a protected asset.</p>
<p>However, make sure that you can afford to spend your savings that way. Don't spend your emergency fund. Etc.</p>
<p>If you might need your savings, make sure you put on the Home Equity Line before you paydown your mortgage. You don't want to have paid off your mortgage, and then be declined for the HE line.</p>
<p>I heard back from one of the (two) emails I sent. Pomona said they cap your home equity at 1.2 times annual income. That's exactly the kind of information I was looking for. Gives me something to go on.</p>
<p>In the meantime, I think we'll pay down the mortgage a little at a time over the next two years, unless the stock market starts going gangbusters and then we'll put those funds into the market instead. Seems like a reasonable compromise.</p>
<p>We paid off our house because there wasn’t much left on the mortgage and cashed out a CD that we would have rolled over at a low rate.</p>
<p>We also thought, if we have to take out a loan to pay for college, wouldn’t it be nice to not have a house note and a college loan note and a car note? </p>
<p>The car will be paid for this year, and hope it lasts through grad school.</p>
<p>No retirement. I’m self employed, and hubby put his retirement in the stock market, so that’s gone.</p>
<p>Would have liked to have put the equivalent of the car note in a retirement account finally, but hate to put money in an unreachable place with college approaching.</p>
<p>My son attends a CSS Profile college that caps home equity in some way relative to income, so since our income is fairly modest it doesn’t matter if we have $100,000 in home equity or $200,000, or more. However, they do factor in the expense of our monthly mortgage payments as a fixed cost, so if we were to pay off our house (ha! like there’s any way to do that! ;)) I think it would actually hurt us a bit in his financial aid award… I mean, some of the money we would then have available because we’re not paying a mortgage would be available to pay for college. Or at least that’s how it looks to me.</p>
<p>That said, I’d LOVE to be able to pay off the mortgage! Maybe before I die… who knows.</p>