If you have kids in their mid teens or even younger, you’ve probably thought more than you wanted about their plans after high school. If you fall into this category you may also know the hot topic is that federal student loan rates have doubled in the past few months making it even more expensive for your children to get a college education. Private student loan rates are even higher.
Double rates mean that most loans will actually cost more than 4 times more to pay them back. Unless your child is of the lucky few to receive a full boat to college, there’s a pretty good chance they’ll be acquiring some type of student loan debt to get their diploma. And now it costs considerably more. Yikes.
If you are a homeowner, one alternative you can look into is utilizing the equity in your home to provide funding for your children’s college education. Using your home as an asset to execute a cash-out refinance is a forward thinking way of negotiating your present family housing obligations with your children’s future education obligations.
A cash-out refinance is when you borrow money above and beyond what your mortgage balance is now, and that money is yours to do anything you’d like with. In general terms, you can borrow up to 80% of the value of your home less your first mortgage balance. If your house appraises at $250,000, 80% of that is $200,000. If the balance of your existing mortgage is $150,000, you get $50,000 back in cash from your closing and you can earmark this for your children’s education.
There are several benefits for taking cash out of the equity in your house:
- Current mortgage rates are several percent lower than current student loan rates
- Primary mortgage interest is tax deductible to you as a homeowner
- Repayment terms go up to 30 years for a traditional mortgage
Many people don’t want to extend their mortgage term but the truth is your monthly cash flow is really the most important part of the equation. If your existing mortgage and housing obligation is tight to begin with and you have some equity in your property, taking cash out on a refinance could put the least amount of strain on your personal budget.