The cost of attending college can be high these days, but there are various ways of funding college tuition.

If you’re looking at funding your kid’s tuition, tapping into your home equity is one attractive option that you’ll want to consider.

So, check out the following helpful guide to learn more. 

Home Equity Loans and HELOCs

If you have enough equity in your home, you have two main options available to use it for funding your kid’s education. You can take out a home equity loan or a home equity line of credit.

Home Equity Loans

With a home equity loan, you can borrow a fixed amount using the equity you have in your property as collateral.

A home equity loan has fixed monthly payments.

Typically, it will have a fixed interest rate over a specified time period.

Many parents choose home equity loans because they are more affordable than personal loans and other funding options.

The loan amount is based on the difference between the value of your property, based on the current market value, and the mortgage balance that remains to be paid off.

Home Equity Lines of Credit

The other option, a home equity line of credit, which is commonly known as a HELOC, typically has variable rates, unlike the fixed rates of home equity loans.

Basically, a HELOC is a revolving line of credit, so it’s similar to a credit card in that you can draw as much as you need, pay it back, and then make another withdrawal, during a determined period of time.

Typically, HELOC draw periods last between five and ten years, followed by a repayment period of between ten and twenty years.

During that repayment period, you can’t draw again. But as soon as you have paid back that initial loan, you can draw on your home equity again.

Furthermore, whether you’re refinancing a second mortgage or not, HELOCs usually have variable interest rates, though some lenders do offer fixed rates for interest.

The Pros and Cons of Home Equity Loans

As with any financial decision, you should spend time looking at the pros and cons of taking out home equity from your home to fund your kid’s college tuition.

So, let’s take a brief look at the advantages and disadvantages of home equity loans.

The Pros

Compared to student loans and other types of loans, home equity loans often have lower interest rates. That means you can save a lot of money over the duration of the loan.

And you can draw a large lump sum, as long as you have enough equity in your property, to pay for your kid’s education. You may not be able to access such a large lump sum via other lending options.

The Cons

The main potential drawback of taking out a type of home equity loan is that, if your financial situation changes during the loan term, you may not be able to pay back the loan. If that happens, you could potentially lose your home.

You’ll also want to make sure that your kid finishes college. If he or she doesn’t, you’ll have taken out a hefty loan for nothing, although that applies to any kind of loan for funding a college education.

Home Equity Loans and the Free Application for Federal Student Aid

When considering whether to take out a home equity loan to fund your kid’s college education, you should be aware that the Free Application for Federal Student Aid doesn’t count your home equity against you.

However, once you take out a home equity loan, FAFSA will consider the cash you receive through the loan as an asset that is offset by the loan’s debt.

Furthermore, some individual colleges that have financial aid programs may or may not consider the equity in your primary residence when determining aid eligibility.