Home equity can pay for college

The cost of college is tremendous, and despite your best efforts, you may come up short when it’s time for your children to start their pursuit of higher education. If you own a home and have equity in it, consider taking out a home equity loan to fund child's private school or college tuition.

A home equity loan is secured by the equity you have built up in your home and can be structured as either a revolving line of credit or a second mortgage. When you choose to obtain a revolving line of credit, the lender establishes a credit limit that depends on the amount of equity you have in your home and your ability to make payments. After the credit limit is established, you can access as much money as you need, up to your limit, whenever you need it by writing a check or using a credit card. Interest rates for revolving lines of credit are variable and tied to an index, but may be guaranteed for a time. Monthly payments will vary depending upon the outstanding balance.

If your choose to take out a second mortgage, you’ll borrow a fixed amount, no more than 80 percent of the equity in your home. That amount is transferred to you in full when you close. You’ll repay that amount over a fixed term, just like on your original mortgage.

Home equity loans include tax-deductible interest and, in most cases, a more favorable interest rate than traditional loans. However, it also puts your home at risk because it serves as collateral for the loan. You’ll also have to pay closing costs, points, and other fees to obtain the loan.

Before you take out a home equity loan, shop around. Compare interest rates on home equity loans with the cost of option options, like financial-aid loan programs, to see if a home equity loan is right for your family.