Should we Refinance Mortgage to Help with College Expenses?

Parents Forum
1

<p>I'm a regular lurker and semi-regular poster and I have posted just enough over the last 18 months that I'm making this one under a different user name.
I am curious if anyone has considered refinancing a mortgage to help with college expenses? My dh has suggested this.</p>

<p>We live in an area with high housing/high cost of living (I assume in the top 5 in the nation). So we have good salaries. but with three kids, we have had expenses. This has included parochial school for all three, plus one child who participates in a pretty pricey outside activity.</p>

<p>I am hoping that people could review what we are considering, and help me see if we are missing anything,</p>

<p>Looking at the 2013-2014 school year, we will have a 4th year college student, a 1st year college student and a HS junior. Looking ahead, I anticipate a 5th year of college for my oldest, 4 years for middle child, plus a mandatory graduate degree (entry level is a M.S) and 5 years for the youngest (would prefer to imagine 4 years, but trying to be realistic).</p>

<p>Oldest child would be about 20K the next two years. Middle Child will be about 30K the next 4 years and I have no idea about grad school...estimating 35K. Youngest is hard to say, but at this point, I imagine an in state option. With costs rising, say 22K the first year and going up 1K each year.</p>

<p>Basically, we'll have kids in college the next 7 years. The next two we'd have 2 in college and 1 in HS. The following 4 years, 2 in college, with the last year, probably one in college.</p>

<p>My estimates are as follows: for the next 7 years: (our costs)
$67,000
$69,000<br>
$55,000<br>
$55,000<br>
$56,000<br>
$57,000<br>
$28,000 </p>

<p>We currently put aside 33K per year for tuition, leaving a shortfall for the next six years of a high of 34K to a low of 22K. Basically, we need an extra 191K. We have about 90K earmarked (savings), leaving a shortage of 100K</p>

<p>We currently owe 90K on our first and 34K on a HELOC. Our equity, even with property values haven fallen, is easily 5 times that. Our mortgage is scheduled to be paid off in Nov of 2016. Our second should be paid off 2 years after that, but really alot faster, since once the first is paid off, we'll put that money towards it as well.</p>

<p>We can refinance for 15 years, with 3% interest (fixed), and our mortgage payment of $2300 and our second of $600 would become one payment of $850. </p>

<p>DH's plan is to refinance, but continue paying at our current rate. Then, depending on the kids (does oldest ds need a full 5th year, does he come home and go to grad school, how much is dd's grad school where does youngest ds go?), we only pay the mortgage and use the differential (25 K per year) to supplement.</p>

<p>If we refinance, but don't need any of the money, we actually pay things off about 4 months early (nice, but not a deal breaker)</p>

<p>If we need the money, we make the smaller payment over the next few years and then throw the mortgage plus tuition money after 6 years, so have it paid off a year or so later. </p>

<p>On the other hand, we can continue to tap our HELOC for colleges expenses if needed. It's currently at 3% interest., However, if the economy goes gangbusters, the rate will rise and its capped at 18%. It can rise .5% every 6 months. We can go up to 100K (so have 65K available to us)</p>

<p>Points to consider:
1. We are pretty good with money. we won't just decide to not pay the extra amount on the mortgage for frivolous reasons.
2. My kids will not qualify for financial aid but won't get any big merit scholarships either. (I agree we shouldn't qualify for financial aid, BTW)
3. My job is extraordinarily secure. Dh's is pretty secure, but he works in defense, so in this day and age, who knows? If the worst were to happen, we'd be thrilled to have a mortgage easily paid by my salary.
4. We want to pay for college. It is our preference for our kids not to have loans, so that's not in the equation unless something really bad happens.</p>

<p>I am leaning towards refinancing. Am I missing something?</p>

<p>Thanks</p>

2

<p>I’m sure that there are those who will disagree, but this sounds like a no-brainer to me. 15 year refi at 3% interest? I’d do it in a minute, you will not see this kind of cheap money again. I’d refi the mortgage, the HELOC, and maybe pull something out extra if I needed it. Tax deductible, and hopefully low/no closing costs. So after taxes, you’re probably paying only 2% interest? What a deal. And you guys sound really organized, not like you’re going to go out and blow it.</p>

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<p>What if the housing market tanks even further and you lose the rest or most of the rest of your equity? What are your plans for retirement? Is your retirement fully funded or on track to be? What happens if one of you lose a job? What does your savings look like? How long could you continue to pay your bills without tapping your equity or retirement accounts? Are you positive your kids won’t qualify for merit? </p>

<p>For the student going to grad school, that child should be looking for funded programs so you and that child do not have to pay for grad school.</p>

<p>What is your current interest rate? I think you should refinance because it’s a smart financial move but not sure tapping your equity is a good idea.</p>

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<p>I am no expert but it think parents age it’s an important factor in this decision.</p>

5

<p>I don’t see a problem with your plan - especially since your DH job is in the defense industry. If the cuts to defense go through you will be much better off with a mgt. of $800/month vs $2900/month. If he should get laid off you well might be not able to refi after that, so I would do it now. You can always, as you said, pay extra on the new mortgage.</p>

6

<p>Just my 2 cents worth. I believe that there are many parents who are sacrificing their own financial future in order to pay for their children’s college expenses. I understand that you don’t want your kids to incur any college loans. But how is taking on this additional debt going to affect your own financial future? Are you fulling funding your retirement accounts? If you plan to retire at a decent age, you don’t want to be working into your 70’s or 80’s to pay off these loans.</p>

<p>Quite a lot has been written about this in the press recently. There was an article in the NY Times on Nov. 11,2012 titled “Child’s Education, but Parents’ Crushing Loans.” Here are a couple of quotes I pulled from the article:</p>

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<p>here’s an interesting read to go along with this conversation. Written by Mark Cuban - on his blog…</p>

<p>I’ve been getting a lot of questions from high school kids asking whether or not they should go to college. The answer is Yes.College is where you find out about yourself. It’s where you learn how to learn. It’s where you get exposure to new ideas. For those into business, it’s where you learn the languages of business, accounting, finance, marketing and sales.
The question is not whether or not you should go to school, the question for the class of 2014 is what is your college plan and what is the likelihood that the college or university you attend will still be in business by the time you want to graduate.
Still in business? Yep. When I look at the university and college systems around the country I see the newspaper industry.
The newspaper industry was once deemed indestructable. Then this thing called the internet came along and took away their classified business. The problem wasn’t really that their classifieds disappeared. It was more that they had accumulated a ton of debt and had over invested in physical plant and assets that could not adapt to the new digital world.
When revenue fell, the debt was still there — as were all the big buildings they had purchased, all those presses they had bought and the declining-in-value acquisitions. But the debt accumulated to pay for them never went away.
They were stuck with no easy way out.
The exact same thing is happening to our 4 year schools. You can’t go to a big state university and not see construction. Why ?
Why in the world are schools building new buildings? What is required in a business school classroom that is any different than the classroom for psychology or sociology or english or any other number of classes? A new library, seriously? What is worse is that schools are taking on debt to pay for this new construction.
Think about this from a business perspective. Schools are seeing state and federal funding decline, as they should. Why should taxpayers be paying for another building?
They are seeing their primary revenue source — tuition, once a number that was never really questioned — becoming a value decision by prospective students. As they should.
Unless your parents are wealthy or you quality for a full ride or something close, the days of picking a school because that is the school you always wanted to go to are gone.
The class of 2014 and beyond now has to prepare a college value plan. What classes are you going to take online that enable you to get the most credits for the least cost. What classes are you going to take at a local, low-cost school so you can get additional credits at the lowest cost.
Then, with your freshman and sophomore classes out of the way, you can start to figure out which school you would like to transfer to, or two years from now, which online classes you can take that challenge you and prepare you for the areas you want to focus on. If you have the personal discipline you may be able to avoid ever having to step on a campus and graduating with a good degree and, miracle of miracles, no debt.
For the smart student who cares about getting their money’s worth from college, the days of one school for four years are over. The days of taking on big debt (to the tune of $1 TRILLION as I write this) are gone. Going to a four-year school is supposed to be the foundation from which you create a future, not the transaction that crushes everything you had hoped to do because you have more debt than you could possibly pay off in 10 years. It makes no sense.
Which in turn means that four-year schools that refuse to LOWER their tuition are going to see their enrollment numbers decline. It just doesn’t make sense to pay top dollar for Introduction to Accounting , Pyschology 101, etc.
Of course, the big schools are going to argue this all day long. They want and need your money. They want to tell you how beautiful their campus is. The social aspects of going away to college. The amazing professors they have. The opportunities they create. The access to alumni and sports. All were great arguments in 2001 when tuitions were still somewhat reasonable. They no longer hold water.
So back to the economics of four-year schools. Before you go to college, or send your child to a four-year school you better check their balance sheet. How much debt does the school have? How many administrators making more than $200,000 do they have? How much are they spending on building new buildings — none of which add value to your child’s education, but as enrollments decline will force the school to increase their tuition and nail you with other costs. They just create a debtor university that risks going out of business.
There will be colleges and universities that fail, declare bankruptcy or have to re-capitalize much like the newspaper industry has and long before the class of 2018 graduates.
The smart high school grad no longer just picks a school, borrows money and wings it. Your future depends on your ability to assemble an educational plan that gets you on your path of knowledge and discovery without putting you at risk of attending a school that is doomed to fail , and/or saddling you with a debt heavy balance sheet that prevents you from taking the chances, searching for the opportunities or just being a **** up for a while. We each take our own path, but nothing shortcuts the dreams of a 22 year old more than oweing a ****load of money.
Now is the time to figure it out and avoid the mess schools are creating for themselves and for those who take the old school way to college graduation.</p>

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<p>Thank you for the replies.</p>

<p>SteveMA: Here are some answers:
“What if the housing market tanks even further and you lose the rest or most of the rest of your equity?”
Um, our house is valued at about 700K+ (we are in a rising housing market) and we owe about 124K. Honestly, what we owe is less than what the house sold for originally 35 years ago. I’m not worried about this one.</p>

<p>“What are your plans for retirement? Is your retirement fully funded or on track to be?”
Yes. Two pensions, both of us with 30 years (projected) and a 401K. Not budgeting in social security in our planning…if we get it, yeah!</p>

<p>“What happens if one of you lose a job? What does your savings look like? How long could you continue to pay your bills without tapping your equity or retirement accounts?”<br>
I won’t lose my job, honestly, unless I commit a felony. If dh loses his, we can survive okay, except for college! Things would be signfiicantly better with a $850 mortgage, spread out over time, than $2900.</p>

<p>“Are you positive your kids won’t qualify for merit?”
Middle child will likely get a little (3-4K). But, yes, I am certain. Not everyone on CC has exceptional kids! (Mine are wonderful, but not exceptional in the eyes of college)</p>

<p>“For the student going to grad school, that child should be looking for funded programs so you and that child do not have to pay for grad school.”
The grad school program middle child is looking at are so incredibly competitive these days, funded programs are rare. Acceptance rates run about 20%. However, if that can be an option, we will consider it. She is saying now she’d like to do her grad program at the local university, and live with us. If that happens, my expenses dramatically reduce. But I am planning for the more expensive option.</p>

<p>“What is your current interest rate? I think you should refinance because it’s a smart financial move but not sure tapping your equity is a good idea.”
I think our interest rate is 6%. If we refinance, we will only refinance what we owe. We won’t take out any equity. </p>

<p>aquamarinesea: Here are some answers:
“But how is taking on this additional debt going to affect your own financial future? Are you fulling funding your retirement accounts? If you plan to retire at a decent age, you don’t want to be working into your 70’s or 80’s to pay off these loans.”</p>

<p>Our current plan is for dh to retire the fall after youngest child graduates. (2019) when he’s 60. I have to work until spring 2022 to get the maximum retirement benefits, unless an enticement package comes along. But I can start working part time in a few years, and take the part time salary, but get full year credit towards retirement. No plans yet which I’ll do. That will depend on what my job is like, kids at home, etc.</p>

<p>emilybee
“I don’t see a problem with your plan - especially since your DH job is in the defense industry. If the cuts to defense go through you will be much better off with a mgt. of $800/month vs $2900/month. If he should get laid off you well might be not able to refi after that, so I would do it now. You can always, as you said, pay extra on the new mortgage.”
That’s what we are thinking as well. My biggest issue is that is dh were to be laid off (he won’t be AFR’d until mid 2014), the odds of him getting a good as job as he had are more limited, especially with his age.</p>

<p>Thank you for all of your thoughts.</p>

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<p>Can you borrow against a paid- up whole life insurance policy? Or what happens if one of you gets hit by a bus next year- what’s the post-mortem financial picture look life? Or god forbid- both of you die simultaneously?</p>

<p>Run a couple of scenarios where your kids are orphaned (or one of you is widowed) and see how the numbers shake out. Then do it again where one of you is disabled.</p>

<p>I have a neighbor with Lou Gehrig’s, three children, his nursing care is probably 1K a week right now. His disability insurance barely covers his non-medical care (eating, etc.) let alone paying the mortgage.</p>

<p>Not to be gloom and doom- but just to make sure you aren’t assuming roses and rainbows…</p>

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<p>Ok, thanks for the answers–um YES, refinance. I was thinking you were pulling equity out. For the $2000/month savings you should be good to go and if you keep making extra payments probably pay it off sooner than you would without refinancing.</p>

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<p>Since you mention you have a pension, I assume you must either work for the US Govt, state or county government, or Dept of Defense. You did say that your husband is employed by the Dept of Defense. I agree that it’s practically impossible to get fired or lose your job if you work for the government. Plenty of job security.</p>

<p>It sounds like you and your husband are absolutely sure that nothing can go wrong with your plan. For your sake, I hope so. My husband and I are financially conservative. We probably wouldn’t take the chance and borrow $100K against our home.</p>

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<p>I agree, you should refinance IF the fees/points are not too high. I do think kids should pay for their own grad school, one way or another… you are very generous already to cover undergrad and (I think) allowing them to come out with no debt.</p>

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<p>I think all the extra information in the OP is clouding the issue, unless I am missing something. She is asking if it is worth saving $2000/month to extend the life of the loan. I had to rethink that because I was thinking you were only adding 3 years to your current loan but you are really adding 12. Have you run the numbers to move to a 5 year vs the 3 year. I’m running simple numbers and I can’t see how it’s a savings at all to refinance to 15 years with only 3 years left on your mortgage. Do you have cash available to pay off your mortgage now? I would lean toward doing that and then dumping the $2900/month into savings–probably a low risk bond fund or something. At 6% your investments aren’t really earning more than that so it makes sense to pay off the mortgage. I just can’t see basically doubling your mortgage right now as making any sense.</p>

<p>I would say pay off the mortgage or refinance for 5 years or less if you can. Ignore what I said in post #10. I was thinking it was only adding 3 years, in which case the numbers work out. 12 years just doesn’t.</p>

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<p>

OP isn’t borrowing $100K against the house, she is just refinancing the existing balances out to 15 years and using the benefit of a smaller payment to provide them with the extra money as they go through those 7 years of needing more. </p>

<p>OP have you looked at the option of just paying off the mortgage and HELOC with the available savings and then having the whole $2900/month to add to your $33K/year you are already contributing to the college fund?</p>

<p>X posted with SteveMA</p>

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<p>I think all the extra information in the OP is clouding the issue, unless I am missing something. She is asking if it is worth saving $2000/month to extend the life of the loan. I had to rethink that because I was thinking you were only adding 3 years to your current loan but you are really adding 12. Have you run the numbers to move to a 5 year vs the 3 year. I’m running simple numbers and I can’t see how it’s a savings at all to refinance to 15 years with only 3 years left on your mortgage. Do you have cash available to pay off your mortgage now? I would lean toward doing that and then dumping the $2900/month into savings–probably a low risk bond fund or something. At 6% your investments aren’t really earning more than that so it makes sense to pay off the mortgage. I just can’t see basically doubling your mortgage right now as making any sense.</p>

<p>I would say pay off the mortgage or refinance for 5 years or less if you can. Ignore what I said in post #10. I was thinking it was only adding 3 years, in which case the numbers work out. 12 years just doesn’t.</p>

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<p>I think it is a good plan. 3% money is as good as one can find. We are doing similar but without the same amount of equity. Sounds like all your bases are covered.</p>

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<p>I personally would not refinance to pay for college, too many “what ifs”. Make them take out student loans and as soon as they graduate you can pay off the loan for them. I know a gentleman that did that for his S and he found the S was much more conservative about spending when he was on the hook for the loan. At graduation dad then paid off the loan. A great graduation gift and a great way to force the student to be responsible with “their” money. </p>

<p>Student should cover their own grad school.</p>

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<p>Below is what the OP wrote when she began this thread. From that, I gathered they would be borrowing an additional $100K against their home.</p>

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<p>I also don’t understand why it would make sense to refinance your existing mortgage (which only has 3 years left on it) to a 15 year mortgage.</p>

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<p>“I also don’t understand why it would make sense to refinance your existing mortgage (which only has 3 years left on it) to a 15 year mortgage.”</p>

<p>Sounds like it’s so they can have far lower payments, and a lower interest rate, refi the HELOC too. Use the extra money for college costs and prepay mortgage.</p>

20

<p>You mentioned that your husband will be retiring when he turns 60. Does he plan to retire for good? Or does he plan to work somewhere else (i.e. defense contractor) either full time or part time? I know this won’t be until 2019 (6 years from now).</p>

<p>I will just share a story about two couples we know. One told us recently that they will be working “forever” to pay off all their kids’ student loans. This couple is in their mid 60’s. Another couple said they will have to work until they are in their 70’s to pay off student loans they took out for their two kids. They are around 60 right now. They are not happy about the situation at all.</p>