Home Equity Loan to Finance Your Education?

Is the equity in your home sitting there untapped while you take out high interest loans to finance your education? With interest rates on home equity loans dropping, this is a good time to reassess your financial strategy for education. While traditional wisdom from the financial experts suggest that borrowing against the equity in your home should be a last resort, that advice hasn’t kept up with the times. The fact is that today’s low interest rates make home equity loans an affordable alternative for those who can’t qualify for government subsidized student loans.

When should you consider a home equity loan for educational purposes? In general, the interest rates on home equity loans are higher than those on federally subsidized loans like the Stafford and PLUS loans, but not everyone can qualify for those. When compared to most private education loans, home equity loans are considerably lower. Before deciding that you should use a private education loan just because it’s labeled as being for your education, do a point by point comparison – then choose the cheaper loan. Don’t forget to include any fees into your cost calculations when comparing the cost of education loans versus a home equity loan.

A home equity loan may also be a good option if your credit has suffered some dings and dents. Education loans nearly always require excellent credit. A home equity loan is secured by your home, and the requirements are less stringent. Do keep in mind that you’re putting your home on the line to qualify, though, and only borrow what you can afford to repay.

Since home equity loans are technically mortgages, the term of repayment can often be far longer than with typical education loans. The term of your home equity loan can run from three to fifteen years. An education loan may offer deferred or interest-only payments while you are in school, but often are for much shorter terms – thus higher monthly payments – once you are finished with school.

Some points to look for when shopping for a home equity loan for education:

- Compare interest rates to find the lowest interest rate for your loan.

- Look for a no-fee home equity loan. With interest rates dropping and tightly regulated, many lenders are offering no-fee loans as enticements for borrowers.

- A convertible interest-only loan can give you the same advantages as a deferred start education loan. If you choose that option, you’ll pay only the interest on the loan for the first two years, while you are still in school.

- A home equity line of credit may be a good choice if you are taking less than a full course load. A Home Equity Line of Credit allows you to draw against it when the bills are due. With a traditional home equity loan, on the other hand, you borrow one lump sum. If your first year costs are over $10,000, a home equity loan may be the best option, since interest rates are generally lower.

If the lower interest rate isn’t a compelling argument, then consider the tax benefits. Home equity loans offer the benefit of tax deductible interest. With a home equity loan, you can deduct the full amount of interest paid from your taxes.

The best reasons for taking out a loan against your house are those that offer a chance for you to improve your circumstances and your earnings potential. A home equity loan to finance your education is exactly that – an investment in your future.