With college-acceptance letters in the mail, hefty bills are sure to follow. If you're tempted to tap your home equity to help cover the tab, conditions are favorable. Real estate values are high, and interest rates low. Those not subject to the alternative minimum tax may also get a tax benefit. Here's a guide to the options. --By Ellen McGirt
HOME-EQUITY LINE OF CREDIT (HELOC)
HELOCs let you tap the equity in your home as cash. You use checks or credit cards linked to the HELOC to draw on the money as needed. The average interest rate nationwide is 5.95%, but the debt on HELOCs is variable, meaning the rate you pay can go up over time. While the repayment period on HELOCs can vary from five to 20 years, these loans are better for those who expect to pay everything back within a few years, limiting the risk of rising rates. Note: because HELOCs are considered revolving credit, if you max out your line, it will affect your credit score.
These loans give you a lump sum of cash at a fixed rate (current average: 7%), with low or no closing costs and a typical term of five to 15 years to repay. That simplicity and predictability is valuable. There are hidden costs, however. If you borrow enough to cover four years of tuition, you'll need to reinvest whatever you don't use right away. And even so, you may not offset the interest you're paying for money you don't need yet.
If you take out a new mortgage for more than the outstanding balance of the old one, the difference is returned to you as cash. Because the financing vehicle is a mortgage, you have a wide range of options: 30-year fixed (current average: 6%), 15-year fixed (5.6%) or adjustable (5.4% for a five-year adjustable). This is the perfect option if your existing mortgage carries above-market rates and you're not close to paying the loan off. Extending the life of a mortgage can add thousands in extra interest over the years. Also, refinancing generally adds about $2,000 in closing costs, and you'll still have to worry about reinvesting any unused proceeds. •