<p>Many years ago, I got a home equity line of credit (HELOC) on our house to have in case of emergencies and with the thought that, if necessary, it could be a fall-back for paying for college for D.</p>
<p>Okay, here we are almost at the end of the road. Would like to know people's thoughts on this. Right now interest rate is at 3%. It is adjustable and has been low since the Great Recession started. Yes, I understand that it could go up at any minute. So rate is one up side to this as is the fact that the interest is tax deductible. We also have a good amount of equity in our house. Bought low a very long time ago.</p>
<p>Down side- borrows against our home equity. Interest rate is floating.</p>
<p>Some banks lately it seems, like to send out letters to home owners stating their home is not worth as much as they originally thought, so they “reduce” the amount available on the HELOC. Check with your bank & make sure this has not happened to you! </p>
<p>We got such a letter last year! Well, it was too late for the bank, we had already used it! (We were glad that we had used it for tuition while it was available to us!) So now we are “upside down” according to the bank! </p>
<p>Yes, the interest is deductible, check with your professional tax preparer.</p>
<p>You’re lucky, SLUMom…I got that letter too, although I’m pretty sure I had plenty of equity left, and my HELOC was “callable”. They had never mentioned that before but, sure enough, it was buried in the fine print. They gave me 45 days to pay off the $18K balance (which I was using for working capital on another renovation). I was forced to sell some other property at a horrible price, was 16 days late paying off the last $3K of it because I did not want to pull money from my IRAs, and it’s still bugging the heck out of me that they reported that to credit agencies! Of course, it doesn’t say that I had paid down 80% of it within the 45 days, was in constant contact with them, and had faithfully paid on that account for over 10 years…not to mention the fact that they hold my mortgage which has also been current for all these years! Thirty years without a single late payment just to be trapped by that little clause…the same bank just sent me a “pre-approved” line of credit offer and I feel like writing “when hell freezes over” on it and slipping it in with my mortgage payment!</p>
<p>SLUMOM- glad to know that others have used their HELOC to fund college. Makes me feel better about possibly having to use it. But I have never heard of a bank reducing or pulling the line of credit out from under like both you and sk8rmom have just said. I am going to call my bank tomorrow and check into this. Would HATE to think that we could not rely on it. Even with the downturn in real estate value, we have a lot of equity in our house and the HELOC is set at half of that equity. Thanks for the heads up!</p>
<p>We used our HELOC throughout the past 10 years, did not take any UG student loans, and are now working to pay down the HELOC balance, it has worked find since the interest stayed low. I have heard many storied of HELOCs being reduced or canceled as the market dropped the past few years, but have never heard of one being called- that is scary! I wouldn’t have the money on the HELOC if I had the cash to pay it off!</p>
<p>^Exactly! Oddly, I just checked my email and the same bank is now spamming me offers for a $200K HELOC because I’m “pre-qualified”. They go on to mention our excellent relationship over the years - guess they forgot they were running scared in 08 and ran right over their customers in the process! Funny that 2 years ago they rudely informed me that my property wasn’t worth anything near $200K without ever even bothering to do an appraisal!</p>
<p>Thanks to this discussion, I called up my bank and found out that our HELOC “expires” as is in 3 years. I will have to refinance any balance at that point and reapply for a new HELOC. Not a problem, but good to know.</p>
<p>We pulled out all of our HELOC funds when we learned banks were doing this. Just in the nick of time too. If you have a good deal on a HELOC, use it. The Direct loans are not great deals interest wise. The only good thing is that they will not pull the rug out from under you. But at those rates, they can afford to guarantee it.</p>
<p>Well, I sent copies of that letter from the bank to the colleges’ financial aid offices, as we received the letter after I had done the CSS Profile and the other school’s own financial aid form, that asks about home equity, market value of house, etc. </p>
<p>I guess we can be “upside down”, we have no plans to go any where at this point!
Hopefully one of our 4 kids will have an “in law” apartment someday at their house! LOL…</p>
<p>Wow, I never heard of a HELOC being callable either. I would be screwed in a major way.</p>
<p>Generally only the interest on $100,000 above what is used to buy or improve your house is deductible (as long as the total of all mortgages doesn’t exceed the market value of your home). So if you have to borrow a lot for college, you might not be able to deduct all of the interest. And if the value of your house has fallen substantially you may not be able to deduct it either. There may also be AMT considerations.</p>
<p>The down-side with using a HELOC is that now you’ve put your home on the line. If for some reason you can’t make the payments (loss of job, disability, death, etc) you can lose your house.</p>
<p>So you have to decide if saving some interest is worth the risk.</p>
<p>A safer, although more expensive strategy might be to co-sign loans, and help your kid pay them off. If the loans aren’t forgivable in the event your child dies (I know, who wants to think about that?) look into getting a cheap (like < $100/year) term-life insurance policy to cover the loan balance.</p>
<p>I’d just point out that if your credit is good and you are in a strong financial position (plenty of room on your home equity, good income to debt ratio) – then if you took the HELOC now when interest rates are a 3% and interest rates started to climb in the future – you would probably be able to refinance to lock in a fixed rate. So I wouldn’t be too worried about the adjustable rate – you will have some options there.</p>
<p>On the other hand, I would point out that you need to look at more than the interest rate to figure out how much you will pay on borrowed money. When I had an adjustable HELOC in the past, the monthly payment rate was NOT amortized in a way that would pay off the loan in the period for which the HELOC was extended. That is, I had a 15-year HELOC, but my payments were only slightly more than interest only – I would have been left with a substantial balloon at the end of 15 years. (I ended up refinancing well before then).</p>
<p>I have opted to take PLUS loans for my kids. The interest rate on the loans for my daughters is much higher than a rate I could have gotten on a HELOC – but the loans are amortized over 10 years and I play to pay them off much sooner. My idea was to borrow about half of my costs for college, pay the other half out of current income or savings – and then once my kid graduated I would be able to shift the funds used for the “other half” of college expenses to pay down the loans at an accelerated rate.</p>
<p>If you look at a loan in terms of the <em>overall costs</em> of interest over the life of the loan, you get a different picture than if you simply look at interest <em>rate</em>. Obviously, if you have a HELOC at 3% vs. a PLUS loan at 8%, if you pay each down at the same rate, the HELOC will save you money. But my point is that unless you are very self-disciplined - you probably won’t end up paying them down at the same rate. If you make smaller payments over a more extended time to pay down the 3% loan, you’ll end up paying more than the 8% loan. With either loan, you will cut down on interest costs tremendously if you simply decide to pay extra – for example, if you decide to add $100 to your monthly payment, that’s going to cut things down. </p>
<p>So it makes sense to run some calculations based on various scenarios and then look at what the total costs will be to you over the life of the loan, as you presently intend to pay it off. Also, consider what happens in the even of an unexpected interruption of income (illness, disability, loss of work). There are some deferment options with a PLUS loan and even some situations that wipe out the loan which would not apply for a home loan-- so I decide that the PLUS was “safer” for my needs. In part that is because I am a single parent and my home is my only major asset, plus I am getting older – so it would be disastrous for me if I became even temporarily disabled and faced loss of my home.</p>
<p>Calmom–excellent point about the open-endedness of a heloc vs. a loan with a pre-determined amortization rate. I hadn’t thought of that. I am pretty disciplined at this stuff and will definitely do the math when the time comes to see which is a better deal.</p>
<p>The beauty of an open-ended heloc, though, is that if for some reason money does get tight, we only have to pay the interest, giving us flexibility where as with a fixed payment loan, we would be forced to pay the whole monthly payment.</p>
<p>Our HELOC is not interest-only - the payment follows some sort of amortization schedule. It is different than a normal mortgage because the amount of interest that gets paid down varies depending on when in the month you make the payment. I just calculated it with our latest amount and it looks like a 10 year amortization.</p>
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If that ever happens, you can make the payment out of your HELOC. We’ve had the rare month were we’ve made the HELOC payment by writing a check out of the HELOC.</p>
<p>I just refi’d the note on my house to 4.375% & was tempted to add some Parent PLUS principal to the loan amount, but in the end I didn’t. Yeah, I’m not thrilled about paying 7.9% (some at 6.125%), but I think it’s best to keep 'em separate. I can always apply for a deferment if my D is still in school & things get tough, but it’s kinda hard to forego a mortgage payment or two. In this economy, foreclosure follows!</p>
<p>And the US Dep’t. of Ed (or whomever they’ve farmed these PLUS loans out to) like earning that 7.9% juice, they want to keep it going, thus they don’t want you to default.</p>
<p>As notrichenough mentioned, watch out for this if you pay AMT - interest on a HELOC that was not used to upgrade/maintain/improve your house will not be tax deductible. The low interest rate may make up for that, but if you’re an AMT payer it’s something to consider.</p>
<p>According to our HELOC, all interest is tax-deductible. There is no delineation between money withdrawn for home improvements or any other expenses. And I feel it is better to have fewer loans/ lines of credit than to take out a plus loan and use a Heloc as a backup to pay for the plus in case of emergency. But again, we are just at the start of this whole horrible process and I am open to anything that works.</p>
<p>I would check the IRS rules on this. IIRC, there are some limitations on the deductibility of HELOC interest although I haven’t looked them up in several years and that may have changed.</p>
<p>Agree that you should check IRS rules - in particular, the rules on Alternative Minimum Tax. When you figure your taxes for AMT, you are not allowed to deduct things like state/local taxes or interest on HELOC or refi that was not for improvements to the house. If you’re not close to having to pay AMT it’s not an issue. But then I’m an engineer not a tax accountant, so can’t give specific advice.</p>