<p>I am doing the financial planning for DD who is going to a college next year. If she got in one of the expensive schools, we would have to borrow against our equity to pay for the expenses. </p>
<p>Which way is the better one to go? Why?</p>
<p>HE usually equals variable interest, but also the flexibility to pay it down more, then take more, then pay it down, etc., back and forth, as circumstances change w/o costing any refi fees.</p>
<p>2nd mortgage would be one amount borrowed one tiime for all four years? Then you are paying interest up front on all that money and there would have been fees at issuance of the loan proceeds, but the interest rate is probably lower and probably level.</p>
<p>Personally we found that the HE worked well for us. Our S is a freshmen this year at a very expensive school (aren't they all?). Anyhow, we only started the loan amount to cover about 3 semesters. Remember a lot can happen during that first year where your child could change their mind on school choices and if the tuition difference is huge between schools you could end up paying back a loan that was never fully used. It isn't fun to have to do the re-finance process again in another 1 1/2 years but as mentioned above you can pay part down and then add on rather easily.
Good luck, there are a lot of options out there.</p>
<p>You should be careful with either type of loan. If you are subject to the AMT, the interest in not deductible.</p>
<p>See if the school offer four year tuition pay up once plan, if they do, I would sign up a 2nd mortgage for that and get it pay off in 5 years. This will be like buying an expensive import luxury car, you pay off car loan usually in 5 years.</p>
<p>I planned to do this, but other factors intervened and I had to raise capital for other reasons. I financed for fifteen years at lowest fixed interest available. Most mortgages can be pre-paid if one desires. (You can check on this.) Your money can earn interest in an account while it waits to go for tuition. Home equity loans are in effect second mortgages. With a refinance there is only one mortgage which turned out to be less per month than paying first mortgage and line of credit. If your house is completely paid, then that's another situation.</p>
<p>I am happy to say that after I pay in December I will half-way through with both kids. D's a junior and S is a freshman. Since I had already remortgaged I'm on the pay as you go cash plan. Yuck.</p>
<p>somehow I did not see a clearly cut answer here. EMM1, what is AMT?</p>
<p>alternative minimum tax. It will cut down on your interest deduction, but not necessarily eliminate it.</p>
<p>An HEL is not secured by your home, whereas an SM is. For example, if you default on your loans and the bank forecloses on the house, the SM is foregiven whereas an HEL is not.</p>
<p>Are you asking if you should get a home equity LOAN or second mortgage? A home equity loan IS a second mortgage. It is for a fixed amount of money. A home equity LINE of credit is probably what you are thinking about. This is a home equity line that gives you the ability to borrow up to a certain amount...and you can do it little by little if and when you need it. When we refinanced our house (with a home equity LOAN) we also took out a home equity LINE of credit. We didn't use it at all for many years, but it was there when we needed it when both kids were in college at great expense for one year. However, I agree with others...it's still a loan...home equity lines are variable rate, and you also can pay interest only. It's not a nice "trap" because there is the temptation to pay the minimum.</p>
<p>A home equity line of credit has worked quite well for us. It's with the bank where we have our checking amount, and we can transfer money online - either to get this semester's tuition or to pay off as big a hunk as we can afford with each paycheck. (I agree with thumper, don't pay only what's required). We ran the numbers and in our tax situation this works out cheaper than a PLUS loan and is much more convienient. I don't remember there being any fees like there would be with an actual mortgage. The interest rate is variable, currently about 7.5%. YMMV</p>
<p>If you do the HEL, pay as you go, and pay as much as you can every month. Not just the interest only payment that is required. When you pay, make sure you designate that the extra is for principal payment.
It wouldn't hurt to sign up with AMS or one of the tuition payment plans so you don't have to take the whole amount on your HEL right away, you can generally write a check off the HEL every month or have money from the HEL deposited into your AMS account monthly as payments are due.
For instance, if your AMS payment is $1300. per month, you can pay in October then try to squirrel away any money you can to pay down the HEL in November, etc.</p>
<p>We plan on using the home equity line of credit, at least while the kids are in school. We've found over the years that if we take money out of the equity line, we bend over backwards to repay it ASAP. We use it more as a cash management tool -- pay some from savings, some from the HELC, then throw $$ from current income to repay it as quickly as possible.</p>
<p>When the kids are finished, we may look at at refinancing our first mortgage and HELC into one 15-year fixed-rate loan. We'll see where the kids wind up for college and what it's going to cost us, first, though. Grad school will be on their dime.</p>
<p>I have never been an advocate of students assuming large loans to finance their undergraduate education if other reasonable options are out their for them.</p>
<p>However I applaud you for taking this burden on yourself as a parent. Hey, let Uncle Sam share a bit in the financing costs! Home equity vs second mortgage? Talk to your banker and figure out which makes more sense considering application costs, interest rates, etc.</p>
<p>However before you go down that self financing road determine if it will be a major impact on your future retirement plans. If the potential exixts that it could I suggest that you consider what we did. At the very start of the college application process(hs jr year), we determined what we were able to comfortable afford and set some firm financial parameters. We explained to our son why we could not offer a blank check, he agreed and began his college research accordingly. That next My he had 6 very nice acceptance offers to consider and was an extremely happy camper. No, the likes of Cornell and CMU did not make his application wish list but by acceptance time they were dim, regrettless memories.</p>
<p>In a major turn of event, CMU has popped up on his grad school radar.</p>
<p>Dad II - Our family did the same as Originaloog's: Early on we explained that we could pay for Flagship U, but anything more would have to have to be made up via scholarships. The latter came to pass, but since we had multiple kids in college we needed to borrow. In Connecticut, home equity loans, home equity lines of credit, and second mortgages are ALL secured by the value of the home. For reasons specific to our family situation we chose the HELOC, though in retrospect a fixed rate HEL would have been a better choice (due to the abrupt rise in interest rates since 2005). Your mileage may vary.</p>
<p>There is no easy answer to this question, as it all depends on individual circumstances and loan options.</p>
<p>given a range of assumptions, though, it would be easy to develop a financial model that compares different scenarios to help one decide.</p>
<p>Think about this, though: The biggest difference, from a financial point of view between a HEL and HELOC is variable versus fixed interest rate. So that leads to obvious questions: How long do you expect to take paying off the loan? What is your risk tolerance for variability in payments? (i.e. can you afford the loan if interest rates jump?). Keep in mind that we've had a decade of historically low interest rates. Wil the trend continue? I have no idea, but take a look at interest rates in the late 80/early 90s to see how high they can go (or, if you really want to quicken your heart rate, look at the early 80s...)</p>
<p>o.k. I got it, I was actually talking about a home equity LINE of credit vs 2nd mortgage. Looks like the interest rate may be the deciding factor. If we coudl afford to pay it off quickly and HELOC has a better rate, we will go that way.</p>
<p>Many thanks to all.</p>
<p>Are all these options tax deductible as a primary mortgage is tax deductable? I figured I need to refinance at some point to pay tuition, but hadn't considered these other options.</p>
<p>Given the problems in the mortage industry right now, I'd think taking on a variable interest rate would be frightening for anyone. Heck, has always been a scary scenario. Why would anyone but the most blindly optimistic get into such a thing? Maybe I'm missing something.</p>
<p>great lakes mom, we took out a HELOC because we don't actually know how much we're going to need to use. Right now, we have a 0 interest rate because we haven't drawn down on the loan. A refinance won't help because the rates are higher now than they were when we got our mortgage, so refinancing won't lower our monthly payments. A second mortgage means that our monthly payments go up, regardless of whether or when we actually need the money. That's something we don't want to do.</p>
<p>We also got the HELOC before the RE bubble burst. I don't know for how much we could actually refinance, given the decline in the value of the home.</p>
<p>We're not blindly optimistic; we just want to pay as little as possible for as short a time as possible. A HELOC lets us do just that.</p>
<p>DadII, HELOC rates are often higher than HEL (aka second mortgages), but the fees for a HEL may be higher. so IMHO, part of the decision is flexibility of drawdown (HELOC) versus the comfort of fixed payments (HEL).</p>
<p>Part of the challenge is that the terms for any one loan can vary widely from lender to lender, w/r/t interest rate, prepayment penalties, fees and so forth. for example, for a variable interest rate loan (most HELOCs), the initial rate may be a teaser. Far better to look at what the index is, and what the margin over the index is.</p>