One of the perks of owning a home is building equity, the difference between what you owe on your mortgage and what your home is worth. If your home is worth $340,000 and you owe $200,000 on your mortgage, you've built $140,000 in equity.
You can borrow against that equity in the form of a home equity loan. When you take out one of these loans, you'll receive a lump sum of money you can use for anything, whether you want to pay for the renovation of your kitchen, pay off high-interest-rate credit card debt or cover a child's college tuition.
How much you get depends on the equity you've earned. Most lenders will give you up to a certain percentage of the equity you've built. If you have $120,000 in equity, a lender might approve you for a home equity loan of $100,000.
Can you use your loan to pay for college tuition?
You are free to use the funds from a home equity loan however you'd like. This includes paying for your or a child's college tuition. Simply use the lump sum payment you receive to pay that tuition.
But should you use a home equity loan for this purpose? That's complicated.
On the plus side, a home equity loan typically comes with a lower interest rate than you'd get with a private student loan, which makes a home equity loan more affordable than a Parent PLUS loan or another private student loan.
But there are negatives, too. The big one? With a home equity loan, your home is collateral. If you stop making your payments — or you can't afford to make them anymore — your lender can start foreclosure proceedings against you, taking over ownership of your home and evicting you from the property.
This can't happen if you, instead, fund a college education with student loans, as your home is not collateral on student loans.
Second, you might not be able to borrow enough money with a home equity loan to pay for college tuition, since it is already high and continues to rise. Also, you might not have enough equity in your home to cover four years of tuition.
Know the tax story
Finally, you'll miss out on tax benefits by using your home equity loan to fund college costs. If you use the money from your home equity loan to pay for renovations or improvements that boost the value of your home, you can deduct the interest you pay on this loan each year. This will reduce the amount of income taxes you pay. You can't deduct interest, though, if you use a home equity loan for any other purpose.
There is no one right answer when it comes to how you use your home equity loan. Paying for college costs might be the best move for you. But consider all your options and work with professionals before making this move.
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