Refinancing with cash out for college costs

[HelloChum]

With the mortgage rates at an all time low, curious if any parents are refinancing their mortgages and taking cash out to help pay for college costs?

I have not looked into college loans yet, as our oldest has 2 years to go before college--but I would imagine that refinancing with cash out would be a better interest rate than college or private loans. I realize that the refinancing would be "our" loan, whereas he would be able to get student loans under his own name. At least the mortgage interest would be tax deductible...

We have substantial equity in the house (even now) and owe very little.

Interested in others experiences, pros/cons, pitfalls, benefits, etc....if we were to do this, it would be best to strike while the iron is hot before mortgage rates are up potentially higher in 2 years.

Thanks!

 

[Darcy03231]

We saved a certain dollar amount for our children's educations. They've all been told what we would give them each year so they knew before making any college decisions. Any overage is on them, either via scholarship or loans.

I would never refinance my home to pay for college costs.

 

[msmayor]

Never once considered refinancing for college. I'm not willing to finance tuition over 15-30 years.

Our daughter is taking the maximum Stafford Loans each year, which will indeed be hers to repay (unless we are in the position to assist once she finishes school). We are pretty much 'paying as we go', utilizing PLUS loans only to bridge cash flow issues with my DH's bonus payments that come once a year.

 

[HelloChum]

Our daughter is taking the maximum Stafford Loans each year, which will indeed be hers to repay

What is the "Maximum" and is it based on financial need, therefore it differs per student? What are the interest rates on student loans?

 

[Purseval]

The only time you should refinance a home is to lower your payment. Your home is where you live, not a piggy bank. Using it like a piggy bank is what got a lot of people into trouble.

 

[*pixie*dust*]

Don't compromise your own security to finance an education that your son may or may not even complete. Paying for school over 15-30 years, even at a low rate is a bad idea.

 

[moongirl]

Just FYI, my brother used to work for Wells Fargo and still has friends that work there. Just last week he told me that he was going to refi his mortgage again because 10 year fixed mortgages had gone down to 3.75%. His old colleague had called him because he knew my brother has 9.5 years left on his current mortgage and, after refinancing he would be able to get out $20,000 in cash and his payment would go up by only $100 and his mortgage extended by only 6 months. For him (he needs a new roof and to update a bathroom), this was a great way to go. If he needed one year's worth of college tuition, it may have also made sense to do this.

 

[robsmom]

I would look into how home equity is treated for financial aid and loans. If you do want to touch your equity, you may not want to do it now. If you do it now and put it in the bank, it becomes available cash which i think is probably viewed differently from home equity.

 

[HelloChum]

Just FYI, my brother used to work for Wells Fargo and still has friends that work there. Just last week he told me that he was going to refi his mortgage again because 10 year fixed mortgages had gone down to 3.75%. His old colleague had called him because he knew my brother has 9.5 years left on his current mortgage and, after refinancing he would be able to get out $20,000 in cash and his payment would go up by only $100 and his mortgage extended by only 6 months. For him (he needs a new roof and to update a bathroom), this was a great way to go. If he needed one year's worth of college tuition, it may have also made sense to do this.

Thanks! I think your example helped explain my question better. In refinancing, we would be able to lower our rate, and for a small increase in monthly payment get cash out which we would be able to put towards college costs.

I heard form other parents with college age kids that scholarships are not a guarantee, nor are the amount of student loans you hope to get.

As college costs are 2 years away, right now I am in the "information gathering" stage of looking into financing options--loans are a reality to many parents in helping their children finance college, I think it is prudent to investigate all options before making a decision. Some private loans have rates of 7.9% and depending on the amount borrowed, you may need a lengthy repayment period. Given that, I was curious if it was other DISers experience that refinancing was a better option given the recent drop in rates. While on the face of it--3.75% in refinancing looks better than 7.9% for a private loan, am I overlooking anything?

Thanks for your replies.

 

[HelloChum]

I would look into how home equity is treated for financial aid and loans. If you do want to touch your equity, you may not want to do it now. If you do it now and put it in the bank, it becomes available cash which i think is probably viewed differently from home equity.

That is a good point--we have been wondering about that.

 

[msmayor]

What is the "Maximum" and is it based on financial need, therefore it differs per student? What are the interest rates on student loans?

The Stafford maximums vary based on the year of study. For freshman, the maximum is $5,500 of which $3,500 is the maximum which can be subsidized (the gov't pays the interest while the student is in school). Sophomore year: $6,500 of which $4,500 may be subsidized. Junior and Senior years: $7,500 of which $5,500 may be subsidized.

A student is always eligible to borrow the maximum as an unsubsidized loan, meaning interest will begin to accrue to the borrower from the date of disbursement on. Financial need must be demonstrated in order to have part of the loan (up to the maximum amount) subsidized.

For the 2009/2010 school year, my daughter qualified for the maximum subsidized loan, so interest is only charged to her now on the $2,000 unsubsidized piece. Her Dad and I are actually paying that interest to keep it from capitalizing to the loan.

The ONLY way to establish eligibility for Stafford Loans is to complete the FAFSA. For HS Seniors entering college in September, the FAFSA application comes out in January (9 months prior) and should be completed.

Interest rates for the upcoming 2010/2011 school year are 4.5% on the subsidized loans and 6.8% on unsubsidized. In 2011/2012 the subsidized rate drops to 3.4% and unsubsidized remains the same. I believe that currently for 2012/2013 both rates are set at 6.8%.

 

[msmayor]

I would look into how home equity is treated for financial aid and loans. If you do want to touch your equity, you may not want to do it now. If you do it now and put it in the bank, it becomes available cash which i think is probably viewed differently from home equity.

Home equity is considered only for schools that use the CSS Profile form as part of the aid application process. For FAFSA-only schools, its better to keep the equity in the house and NOT as cash in the bank, as cash in the bank will count as available assets.

For the Profile schools, it won't matter if its equity OR cash in the bank...it will count as available funds.

Those in the planning stages remember: the amount of debt you have doesn't matter one bit when applying for financial aid. It will not matter that you are stretched thin by a big mortgage or have substantial consumer debt. The only time an exception may be made (and its case-by-case as evaluated by individual schools' financial aid departments) is if debt is due to significant medical bills.

 

[HelloChum]

msmayor:

Thanks for the info--I found it very helpful.

 

[DawnM]

Actually, we refinanced to pay MORE per month. We went from a 30 year to a 15 and we were doing it to save on that bottom line of amortization!

Dawn

The only time you should refinance a home is to lower your payment. Your home is where you live, not a piggy bank. Using it like a piggy bank is what got a lot of people into trouble.

 

[Sadie22]

Thanks! I think your example helped explain my question better. In refinancing, we would be able to lower our rate, and for a small increase in monthly payment get cash out which we would be able to put towards college costs.

I heard form other parents with college age kids that scholarships are not a guarantee, nor are the amount of student loans you hope to get.

As college costs are 2 years away, right now I am in the "information gathering" stage of looking into financing options--loans are a reality to many parents in helping their children finance college, I think it is prudent to investigate all options before making a decision. Some private loans have rates of 7.9% and depending on the amount borrowed, you may need a lengthy repayment period. Given that, I was curious if it was other DISers experience that refinancing was a better option given the recent drop in rates. While on the face of it--3.75% in refinancing looks better than 7.9% for a private loan, am I overlooking anything?

Thanks for your replies.

You need to study how the college federal financial aid system works as well as starting to visit colleges you can afford and investigating private financial aid programs. The high school guidance counselor can help. Your child may not qualify for federal grants but may earn merit-based scholarships and awards. For example, your employer may have a program. Various corporations have programs. If your child has a career in mind, consider how much a first year salary will be when considering how much should be spent on education. Make sure your child applies to more than one institution as each may provide differing amounts of financial support. Many may give funds to members of the National Honor Society, or to Eagle Scouts and Girl Scout Gold Award recipients.

Sometimes the smaller, private institutions have more money to give to students so that they end up being more affordable than the state schools. The intended major or an extracurricular activity such as band or sports can make a difference as well.

Advanced-placement courses taken in high school, provided the student scores well, may count toward college credit. This varies by institution. Community college attendance is another way to hold down the costs of college.

You have more than one child. Borrowing against your home equity should be the last resort.

 

[powelweb]

You might want to look into a college financing class at your local high school to learn more about the various options.


good luck

 

[bootleg89]

I would encourage it as a means to lower your interest rate and save some $ in the long run, but not to pay your kids college ed.
When I started as a freshman in college, I had a friend whos parents did just that in order to send her and her bro to college-1 year apart. Unfortunatly, she ended up giving up college and her rents' money pretty much went down the drain.
Not to say that ur child would do that but, u don't really know what life has in store.
Also as others have mentioned, when applying for aid, they don't ask how much equity u have in ur house but how much u have in saving to determine what aid u receive.
Best of luck.