AEM Mortgage Minute with Deanna Daughhetee

There’s nothing as exciting to parents as the thought of their child heading off to college. But it can be equally depressing financially. That’s because college tuition rates are skyrocketing. Annual tuition increases of nearly 10 percent at public universities are easily out-pacing inflation’s long-term two-to-three-percent average yearly increase. Tapping into retirement accounts for tuition might jeopardize retirement plans and cost you more in the long run. As a result, parents are using the equity in their homes to obtain a Home Equity Line of Credit (HELOC) and, in most instances, enjoying the tax advantages that go along with borrowing from their home’s equity to pay for tuition. It can be a wise use of their home equity.

Understanding a Home Equity Line of Credit (HELOC)

A HELOC is a line of credit borrowed against the equity in your home. It differs from a home equity loan in that you don’t need to borrow the entire lump sum at once. You borrow the money you need, when you need it. Suppose you need $6,000 for tuition, and you have a $20,000 home equity line of credit. Simply take out the $6,000 you need, which allows you to avoid paying interest on the money you don’t need. This saves you money on interest and gives you the flexibility to access the money next semester when you need it.

The interest rate on a home equity line of credit is adjustable and generally tied to the prime interest rate. If the prime rate increases, so does your interest rate. However, the prime rate is generally not as volatile as some indices. Many HELOCs offer what is referred to as lock options. This means you as the borrower can lock a portion or all of your current loan balance to a fixed rate numerous times throughout the year. Ask one of our Mortgage Consultants for more details.