Using Your Home Equity for School Funding

Because most people in the U.S. have borrowed money to finance their home, the lender owns a portion of their home and the borrower owns a portion of the home. Each month, when the mortgage bill is paid, principal or equity is built up in the home and interest is paid on the money borrowed.

The portion of the home owned by you or your parents is a reflection of the fair market value in the home and the equity that has been built up in the home over the time spent paying for the home. When considering alternative sources of income for college education, some have considered borrowing money against the equity in their home. This is called a home equity loan.

In order to obtain a home equity loan, you don’t sell the home, you simply borrow against the portion of it that you or your parents own. This is a pretty secure loan for lenders because people don’t default on these loans very often – this is where they live and they want to go on living there.

Usually money from a home equity loan is amortized over a 15 year time frame. Sometimes these loans are negotiated for longer but that depends entirely on the needs of the borrower and the rules of lending established by the lender. If the home is sold during the time the loan is being paid, the equity loan must be paid off in full.

There are two ways that you can borrow money against the equity in your home. You can borrow one lump sum which you pay back each month over the time frame given by your lender. Most of these loans can be repaid early with no penalty after a couple of years into the loan.

Another way to borrow against the equity is with a home equity line of credit. This is more like a credit card that has a certain limit. You pay on it and reduce the amount owed but you can also take more money out, up to the limit, as needed for expenses; in this case, for college expenses.

There are pros and cons to using the equity in a home to help pay for college. If you have a lot of equity and a way to pay it back beginning within a couple of months of borrowing the money, this might be the best route for you and your family. If you need to wait until after you graduate and begin working to pay it back, you should consider other college loan options.

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