Giving
your kids a start with a home equity loan Your child
got into the college of her dreams, complete with a great dorm
room. But how is her college education experience treating you?
The cost of sending a child to school can be an overwhelming
burden to the parents' finances. If you're a homeowner, dipping
into the equity you amassed in your home while your kids were
growing up might be the ticket for covering the high cost of
education. Or maybe you'd just like to give your adult kids a
leg up, with a down-payment check for their first home.
What is a home equity loan?
Equity is the difference between your home's appraised -- or
fair market -- value and your outstanding mortgage balance (if
any). A home equity loan allows you to borrow up to 125 percent
of the value of your home, less existing mortgages.
Why it's worth considering
There are many reasons why using a home equity loan makes sense
to help your child move on to the next stage of his or her life.
For one, they're often a more attractive option than selling
investments. Going that route sacrifices any future return on
your investments and could result in a hefty capital gains tax
bill.
Home equity financing also makes more sense than cashing in your
retirement funds. You may be charged a higher rate of interest
to borrow against your retirement and also may be required to
pay a penalty. And don't forget the income tax you'll have to
pay on the withdrawals.
Since home equity loans or lines of credit are secured against
the value of your home, they usually have lower interest rates
than unsecured loans. In addition, the interest you do pay may
be tax-deductible (up to $100,000), though you should consult a
tax advisor about your situation.
Mortgage rates are still low enough that taking on more house
debt is not as onerous as it once was. On average, house values
have climbed consistently over the past several years,
indicating a reasonable expected return.
Tread carefully
Take care to have thought out your decision thoroughly before
venturing into this territory. As accessible and attractive as
this ready source of funds seems, there's still risk involved.
If you've reached the life stage where you're considering giving
your kids a financial boost, you've also reached the one where
the necessity of retirement planning starts to loom. By putting
more debt on your paid-off or soon-to-be-paid-off home, you risk
sabotaging your own retirement nest egg.
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