<p>Examine the transaction costs of both.</p>
<p>chedva, thanks. I once was approved, at the time of a refinance for a HELOC, as it seemed a good idea in case of emergency. But never used it, and when I asked if I could temporarily draw on it, a year or so later, they looked at me as if nuts, as it had expired or something. Obviously, I need to check with a banker or two, and figure out which way to go when the time comes. For various reasons, I've refinanced numerous times, and don't want to give up my current good mortgage rate. But though it was inevitable. Maybe not.</p>
<p>We have carried an open HELOC for some time, left over from a small loan for some remodelling, so it just sits there if we need it.
we looked into a second mortgage in order to raise some cash to pre-pay tuition, but in the end we elected to pay as you go. We have not dipped into the HELOC. BUT, we would have come out ahead to have borrowed the money, and pre-paid the tuition - we would have needed to borrow about half the lump sum cost.
For anyone considering this, 5% is a reasonable amount of yearly tuition increase to assume - sometimes you will get burned, especially at state schools.</p>
<p>As long as your payments for first mortgage and HELoan or line of credit are affordable with your income, no need to care about the mortgage market mess.</p>
<p>To correct a misunderstanding</p>
<p>
[quote]
An HEL is not secured by your home
[/quote]
Not true. The E is "equity" meaning precisely that it is secured by your home. So treat with caution.</p>
<p>the line of credit is better if you don't know when, or whether, you will need it, and don't know how much you will need. You can wait until you need the cash, then borrow only what you need. The Loan is a fixed amount, borrowed up front. Depending on your circumstances, this may not be necessary. the loans often have lower interest rates, but more fees. Both depend on whatever the bank marketing people are doing in your area at the time you make the arrangements.</p>
<p>We have have a line of credit for years, never used it. Every now and then the bank checks whether we still want it, and never implied that we had to use it to keep it. For some bizarre reason, they also send a "zero balance" statement every month. Waste of paper.</p>
<p>We took a home equity line of credit 2 years ago and only draw on it as needed and when the interest rate is ok. We are using it for both college and to do many needed upgrades on the house. Our financial planner suggested this and it has been a good choice for us.
DD will be responsible for paying us back $10,000 a year (she goes to a private college and this is her agreed upon portion...either thru scholarship and/or this loan). We are charging her the interest minus the amount that we use as a write off on our taxes. She would never have found as a good a deal at a lender (and doesn't qualify for any financial aid). She has already paid her first year's portion thru scholarship and summer earnings.</p>
<p>afan, thanks for straightening that out (so I don't have to). Of course your home is on the line with a HELOC (Home Equity Line of Credit). Why would it be called a Home Equity Line of Credit? You don't pay the loan, they take your home! </p>
<p>I applied for a HELOC last year just so that I would have one in case of emergency. I have no plans to use it. The bank keeps sending me checks inviting me to write them, which would activate the HELOC, but I just tear them up and throw them in the trash. It costs me $50 per year to keep the HELOC and I can borrow up to $200,000 if I needed to (I don't even know the rate). I figured I would sign up when I didn't need the money, because if I ever DO need the money, chances are they wouldn't approve me! (That's just the way these things tend to work!)</p>
<p>NJres, that was our original thinking too - H was about to be between jobs and if we had needed it, that would have been a painless way to tap our home equity for living expensives. We're just using it as a cash management tool now - if things go right, we'll have this year paid off by next August. A payment plan from the college may work better for many people, but didn't come out cheaper for us.</p>
<p>We showed dragongirl the amount we have saved for her college (easier for the last kid!), told her what we could pay out of pocket each year, and told her the rest was up to scholarships. We wouldn't let a kid borrow large amounts at 18 - they just don't understand debt. If, on the other hand, her school costs increase more than we can add from our out of pocket expenses, she may have to take some small loans or work during the school year. I certainly wouldn't risk our future for the school of her dreams.... dreams change too fast at that age!</p>