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.

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