Should I borrow money from my home to pay for college?

With the price of college tuition on a steady climb, it’s no wonder future college students and their parents are proactively exploring ways to cover the skyrocketing costs. If you have a large amount of equity built up in your home, a home equity loan or a home equity line of credit (HELOC) for college tuition may be the financial assistance you’re looking for.

Learn how to unlock the equity stashed in your home. Even with lower credit, you may qualify to use a home equity loan to cover educational expenses.

Can I use a home equity loan to cover college tuition?

Yes, you can use a home equity loan to pay for your college expenses or your child’s. Home equity loans can be valuable tools to finance large expenses with a lump-sum payment. With the necessity and price of a college education going up, a home equity loan may be a good idea to fund college tuition and fees.

You can borrow against the equity in your home in two popular ways: taking out a HELOC or a home equity loan. A HELOC, or home equity line of credit (which Rocket Mortgage^® doesn’t offer), works like a credit card. You receive a revolving credit line you can withdraw from as needed. Home equity loans provide a lump sum at a fixed interest rate.

But these long-term solutions are a long-term responsibility that may not be right for everyone. From federal student loans to scholarships and work-study, parents and prospective students should exhaust all financial aid options before deciding to borrow money from their homes to pay for college.

The pros of using home equity to pay for college

Using a home equity loan or HELOC to pay for college offers several benefits. Let’s explore the primary benefits of using a home equity loan to pay for college.

Potentially lower interest rates

HELOCs and home equity loans largely attract borrowers because they offer relatively lower interest rates than other high-interest loans or credit cards. Paying for college on a credit card or personal loan would be much more expensive than a home equity loan. Even if you got an excellent rate with either option, you likely wouldn’t get enough money to cover the costs of a college education.

You can get more favorable rates with HELOCs and home equity loans because they’re backed by a valuable asset: your home. Financial institutions are more willing to approve a large loan amount when a borrower provides collateral.

Interest rates that won’t change

Home equity loan interest rates are typically fixed, meaning you’ll make the same monthly payment over the life of the loan. A consistent payment can make it much easier to plan for your future finances and may even help you feel more confident about your ability to afford the loan.

Other options to pay for college tuition, like HELOCs, may not offer fixed interest rates. If market rates increase over the life of your loan, you’ll be making larger monthly payments. This uncertainty can make it much more difficult to plan for your future and make financial decisions much more stressful.

Potentially easier qualification requirements

Your home’s equity is a powerful tool that can help you qualify for a larger loan with better rates, even if you have bad credit.

Because you’re asking for an especially large sum of money, lenders will need a solid incentive to allow you to borrow from them – and that’s where your home comes in.

Collateral provides lenders with additional security. If a borrower defaults, they can sell the home to recoup their losses. While leveraging home equity can increase your risk, it’s the reason a lender can offer a loan large enough to cover the costs of college tuition at favorable interest rates – even if you don’t have a stellar credit history.

While credit requirements can vary, lenders typically require a minimum credit score of around 620. A lower credit score may result in less favorable terms.

The cons of using home equity to pay for college

There are also downsides to using a home equity loan for college.

Your house is collateral

Your home is the asset that produces the pros we mentioned above, but it can also be a possible con when you use it to secure a HELOC or home equity loan to pay for college. If you run into financial hardship and fall behind on the payments for your home equity loan or your original mortgage loan, you could risk losing your home.

If you’re struggling to keep up with your payments and are at risk of default, don’t wait until your lender has initiated foreclosure proceedings to take action. Your lender doesn’t want you to default on your loans. Talk to them about your options to resolve the situation.

Loan limits may be too small

The maximum loan amount you can qualify for with a home equity loan will depend on the equity in your home. You can build equity in your home through your monthly mortgage payments while the home’s value appreciates over time.

The longer you own a home and the more mortgage payments you make, the more equity you own. A home equity loan may not work if you don’t have enough equity to cover the entire cost of college – and the same applies to HELOCs. HELOCs only offer access to a predetermined revolving line of credit, making it challenging to access large lump sums of money.

The approval process takes time

HELOC and home equity loan approval can take weeks. They won’t be a suitable option if you need cash fast.

Everything takes time, including collecting and submitting your financial documentation, such as proof of employment, recent pay stubs and tax returns, with your application. Most lenders also require a home appraisal to confirm the value of your home. Once the lender factors in your home’s equity, your credit score and your debt-to-income ratio (DTI), you’ll receive a lump sum or line of credit after approval.

Alternatives to using home equity for college

HELOCs and home equity loans aren’t the only way to pay for college. We’ve collected some popular alternatives to consider.

Federal student loans

Federal student loans are often the first option for students and parents looking for a way to pay for college.

The federal government funds federal student loans and incentivizes pursuing a college degree through multiple benefits, including fixed interest rates and flexible repayment plans. The payment of federally subsidized loans is deferred until at least 6 months after college, allowing you to focus on school and getting a job before repaying your loans.

The federal government offers multiple options to assist borrowers when they’re struggling to repay their loans, like a loan subsidy to pay down interest. Borrowers may even be allowed to lower or postpone their payments temporarily. Most federal student loans don’t require a credit check to qualify.

A potentially major downside to federal loans is the limit on how much you can borrow, which may not meet the cost of college today. Students who are dependent on their parents can only borrow up to $31,000 over their entire undergraduate education. Independent students can borrow up to $57,500.

Because these amounts won’t cover the entire cost of attendance, students and their parents often look to supplement the costs.

Private student loans

Private student loans can bridge the financial gap left by federal student loan limits. Private student loans are funded by private banks, credit unions, state agencies and even some schools. They’re typically more expensive than federal student loans and don’t offer the same flexibility or benefits.

Private loans can have variable rates that change with the market and may require a credit check or applying with a co-signer with good credit. They also have less flexible repayment options than federal loans.

Private student loans differ from federal student loans. They represent a broad category of loans with terms that can vary widely depending on the lender. It’s essential to shop around for the best deals and compare loan terms before signing a loan agreement.

While private loans may have more stringent and expensive requirements, they don’t limit how much you can borrow, making them a popular tool for students and their parents who have maxed out on federal student loans.

Personal Loans

Personal loans are best used to cover smaller shortfalls between college expenses and any financial aid. Personal loans are unsecured, so unlike a home equity loan, you don’t have to offer any collateral to secure the loan.

While you won’t risk losing a valuable asset, you may pay a higher interest rate and receive a smaller loan than you would with a home equity loan. Personal loans typically have higher interest rates than federal or private student loans and may not offer repayment terms conducive to a student’s college timeline.

However, you can use personal loans for any purpose. You can also use them to pay expenses beyond college expenses.

Credit cards

Credit cards typically have the highest interest rates, often over 20%. On top of high rates, many colleges charge 2% – 3% convenience fees if you pay your tuition with a credit card.

While some credit cards offer programs that reward you for spending more, convenience fees usually negate those rewards. Charging significant college expenses, like tuition, is generally not recommended.

How to decide if using home equity to pay for school is the best option

Here is what to consider before making a final decision:

Consider how much equity you have in your home

To get a home equity loan or home equity line of credit, lenders typically require at least 15% – 20% equity in your home, and they won’t allow you to take out all your equity. To determine how much you may receive with a home equity loan, you must calculate your loan-to-value ratio (LTV).

Let’s say your home is worth $300,000. You have $150,000 left on your original mortgage, and your lender will allow you to borrow up to 80% of your equity with a home equity loan.

To calculate how much you may qualify to borrow, multiply your home value by the percentage of equity your lender will allow you to borrow: $300,000 ? 80%, which is $240,000.

Then subtract the outstanding balance of your mortgage: $240,000 – $150,000.

Your maximum loan amount would be $90,000.

Your closing costs will equal 2% – 6% of the total loan amount.

With this example, you’d pay between $1,800 and $5,400.

Consider your time frame

Approval for a home equity line of credit or home equity loan takes time. The application and approval process can take weeks and involves extensive research and verification of your finances. This process won’t happen overnight. If you need funds fast for college, consider other options.

Consider your budget

Home equity loans and HELOCs are considered second mortgages. You’ll repay the HELOC or home equity loan on top of your original mortgage. That’s two mortgage payments every month. Managing both payments may require significant financial planning – even with a steady income.

Consider your age

If you’re approaching retirement age or plan to retire before the loan term ends, making both payments may be even harder. Consider your age and how much longer you plan on working before applying for a home equity loan.

How to get a home equity loan or HELOC for college

Follow these steps to get a home equity line of credit or home equity loan to pay for college.

1. Calculate your loan needs: Determine how much you may need to borrow after accounting for other financial assistance, like scholarships and work-study.
2. Estimate your equity: Use an online calculator to determine how much equity you have in your home. Most lenders require at least 15% – 20% in equity to get a home equity loan or HELOC.
3. Compare your loan amount to your equity: If your desired loan amount is more than the equity you can borrow against, you may need to supplement your HELOC or home equity loan with another loan option.
4. Decide between a HELOC and a home equity loan: While home equity loans and HELOCs have distinct advantages, a HELOC may be more suitable for ongoing, long-term expenses, like tuition payments.
5. Find a lender and apply: Once you find a lender, you must provide financial documentation to verify your ability to repay the loan. The lender will likely require a home appraisal to verify the home’s current market value, establishing how much equity you have to borrow.
6. Close on the loan: Upon approval, you’ll close on the loan and receive a line of credit or a lump-sum payment you can use to pay for college.

The bottom line

Using a HELOC or home equity loan for college tuition can be a wise investment. If you have a lot of equity in your home, consider converting it into cash to fund college.

If you need the money quickly or don’t want to risk losing your home, leveraging your home equity may not be the right choice. And consider alternative sources for financial assistance, such as government or private student loans, while researching lenders that offer HELOCs and home equity loans.

As a reminder, Rocket Mortgage doesn’t offer HELOCs. But once you’ve completed your research and are confident a home equity loan may be the right option for you and your family, you can apply online with Rocket Mortgage today!