The cost of a college education is more than many families can afford to pay out of pocket. If you’ve owned a house for several years and built equity, you might be thinking about refinancing to access some of that money and use it to finance your child’s tuition. Before you go that route, carefully consider the pros and cons and explore other options.
How a Cash-Out Refinance Works
A cash-out refinance can let you receive a portion of the home equity that you’ve accumulated in a lump sum. You’ll have to pay closing costs, which can be several thousand dollars.
If you choose a cash-out refinance, it will increase the total amount that you owe on your mortgage. You’ll have to make higher monthly payments after you refinance, and your interest rate and loan term might also change.
A lender will require you to have a minimum percentage of equity and will place a limit on the amount of equity that you’ll be allowed to cash out. Your credit scores and debt-to-income ratio will influence your ability to qualify and the terms of your new loan.
Pros and Cons of Using a Cash-Out Refinance to Pay for College
Tapping into your home equity can give you access to a large sum of money all at once. It might be easier to qualify for a cash-out refinance than a personal loan, and you might get a lower interest rate.
If you refinance, you’ll just have to make one monthly mortgage payment. If you take out a separate loan to pay for college, you’ll have to juggle two monthly payments. Refinancing might make it easier to budget.
A cash-out refinance can be risky. If you don’t keep up with your higher mortgage payments, you can lose your house in foreclosure.
Paying more for a mortgage every month can leave you with less money available to invest for retirement. You might have to cut costs in other areas to save enough for retirement or keep working longer than you planned.
If you extend your loan term, you might have to delay retirement so you can pay off the mortgage before you stop working. If you retire and you still owe money on your mortgage, you might have to work part-time to make ends meet.
Figure Out What’s Right for Your Family
A cash-out refinance can make college more affordable, but you have to be realistic about your budget. Don’t spread yourself too thin trying to pay for college and put your family home and your own future in jeopardy.
Explore other options and sources of funding. Find out if your child qualifies for grants, scholarships, or student loans. Your child can also work during the school year and over the summer to cover some of the cost of higher education, attend a less expensive college, or live at home and commute instead of living on campus.
