Using A Home Equity Loan To Pay For College: A Guide

Higher education can be expensive, but there are a few ways to help finance it. Homeowners have the option to use equity built in their home. However, using a home equity loan for college may not be the best choice for everyone. Consider the benefits and drawbacks so you fully understand what you’re getting into and make sure you know the alternative finance options you may have.

Can You Use A Home Equity Loan To Pay For College?

Yes, you can use a home equity loan to pay for college. This loan taps into your home equity – the difference between your home’s current value by what you still owe on your mortgage. For example, if your home is worth $425,000 and you still have a $300,000 mortgage, you have $125,000 in home equity. 

While the amount you can borrow is largely dependent on your home equity and other factors such as your credit profile, you can use the loan proceeds for almost any purpose, including paying for college. Still, there are risks involved and interest rates for these loans may not be as favorable compared to other loan options.

Pros And Cons Of Using Home Equity Loans To Pay For College

There are several benefits and drawbacks of using a home equity loan for college tuition and related costs.

Pros

• Lower interest rates: In many cases, home equity loan interest rates tend to be more competitive compared to other funding options like personal loans or private student loans.
• Funding flexibility with school expenses: Home equity loans can be used for almost any needs. They’re flexible enough to use on any school-related expense, like tuition, room and board, textbooks, dorm needs and school supplies.
• Fixed interest rates: Most home equity loans offer fixed interest rates, which don’t change for the life of the loan. You can predict how much your monthly payments will be since they largely stay the same.

Cons

• Your home acts as collateral: A home equity loan is a secured loan, using your home as collateral. That means if you fail to make payments and default on the loan, you could lose your home.
• Loan fees: Many home equity loans charge fees, like application or origination fees. If you’re late on payments, you could also be charged a late fee.
• Closing costs: Closing costs are also fees you pay to take out a home equity loan and typically range anywhere from 2% to 6% of the loan amount.

Steps To Getting A Home Equity Loan For College Funding

Getting a home equity loan for college funds takes several steps, including shopping around for lenders and submitting documentation for the underwriting process.

1. Calculate Your Home Equity And Your Budget

Understanding how much home equity you may be able to borrow can help you budget for college funding needs. That way, you can see if you have enough or if you’ll need to look at additional funding options as well.

To calculate your home equity, take the fair market value of your home and subtract it from the amount you still owe on your mortgage. You can find out how much your house is worth by contacting a real estate professional. Or you can make a rough estimate by average how much homes have sold for in your area that have similar features.

Keep in mind that lenders may not allow you to borrow the entirety of your home equity. In most cases you can borrow up to 90%, depending on your credit and your lender. For example, if you have $125,000 in home equity, you may only be able to borrow up to $112,500.

2. Check Your Credit Score

Checking your credit score can help to see what your chances are to qualify for a home equity loan. The higher your credit score, the more likely you’ll qualify for more competitive rates, though it’s up to the lender what their minimum requirements are. In most cases, you’ll need a good credit score — most home equity loans require a minimum credit score of around 680 to qualify for a loan.

3. Pick Your Lender

Shopping around for lenders helps ensure you’re getting the best rates and terms based on your needs and financial profile. Taking the time to do so can save you thousands of dollars or more over the life of your loan.

4. Apply For The Loan

Follow the lender’s instructions on documentation you’ll need. The required documents will likely include:

• Driver’s license or other government-issued ID
• Pay stubs
• Mortgage statements
• Bank statements
• Tax returns

Many lenders also schedule a home appraisal to determine the value of a home. The loan approval process will vary by lender, but it typically takes around several weeks.

Alternative Funding Options For College

If you decide that a home equity loan isn’t the best option for you, there are other funding options like scholarships, federal student loans and private student loans.

Federal Student Loans

Most financial experts recommend turning to federal student loans first as they offer lower interest rates and benefits you won’t get elsewhere. These include grace periods and income driven repayment plans. There are different types of federal loans, including subsidized (where interest doesn’t accrue as long as you’re in school at least half-time or during deferment) and unsubsidized loans. You will need to fill out the Free Application for Federal Student Aid (FAFSA) to determine your eligibility.

Private Student Loans

Private student loans are a good option if you’ve exhausted your federal loan options and need extra funding to help pay for college. You won’t get access to programs like income-driven repayment plans or even deferment, but you may be able to score competitive interest rates. Many private lenders allow you to use loan proceeds for almost any college-related expense.

Scholarships And Grants

There are plenty of different scholarship and grant options available to students. To start, look in your local area for any relevant associations or do an online search. Many grants and scholarships are available for folks from certain demographics and pursuing certain fields of study.

Savings Accounts

If you have some time before you or your child pursue higher education, consider different savings account options, like a 529 plan. Money in these types of accounts grows tax-free, and withdrawals are also tax-free as long as the funds are used for qualifying educational expenses. Consider seeking the help of a financial advisor to help guide you through the options for your needs.

The Bottom Line

While you can use a home equity loan to pay for college, this type of funding option may not be for everyone. Before applying for a loan, consider all your options, like federal and private student loans. If you do decide that a home equity loan is for you, consider starting an application with our friends at Rocket Mortgage^® to convert home equity into cash and fund your college education.