Most jobs require some level of training and education, and by going to college or university and getting a degree, you can strengthen your ability to secure a decent job that pays well and offers comprehensive benefits.
The thing is, however, college is expensive. And not only do you have to cover the cost of the actual tuition itself, but also books, room and board, meals, and have enough left over for spending money.
So, how will you pay for your college career? Depending on what you study and how long you stay in college, you could be looking at tens of thousands of dollars, if not more. In fact, it’s not uncommon to pay over $100,000 for college. That’s a hefty sum that most people don’t have access to in liquid cash. As such, you’ll need to figure out how to pay for your post-secondary education.
While taking out a student loan is a common route to take, some people consider a cash-out refinance instead of taking out a student loan. By taking this route, you’d basically be using your home equity – the money that you actually own in your home – to gain access to cash. But how can someone know if a cash-out refinance is the answer for them? There are several factors to consider, including the following.
One of the more important factors that people need to consider is the interest rate on the cash-out refinance. The higher the interest rate, the more expensive the new loan is going to be.
The total cost of the refinance, including the interest rate, points, origination fees, and other expenses, must be weighed against the cost of attending college, which often comes in the form of a student loan. Which is going to be more cost-effective? The refinance or the student loan?
It’s imperative to do a little number crunching to accurately compare the cost of refinancing to tap into your home equity in your Washington home before you decide that this is the best and most cost-effective route to take.
Another important factor to consider is the size of the loan. Ultimately, the size of the loan is going to impact the final cost of attending college. The larger the loan, the more you will have to pay in terms of interest.
As with the interest rate mentioned earlier, the size of the student loan should be compared to the cost associated with refinancing. Only after careful comparison should you make a decision on whether or not to use your WA home’s equity to use to cover the cost of your college tuition.
With a cash-out refinance, you won’t have to pay income taxes on the money you gain access to because the money isn’t considered as income. But if you choose a second mortgage, you’ll need to consider the tax implication.
Not all interest on a first mortgage can be deducted at tax time. Changes to the law surrounding the Mortgage Interest Deduction have taken place thanks to the Tax Cuts and Jobs Act, which took effect starting with tax returns filed in 2019. Couples who file jointly can deduct the interest up to $750,000 on qualified residence loans, and those filing separately can deduct interest on up to $375,000.
But some of the interest can still be deducted on a first mortgage. On second mortgages, that’s not necessarily the case. As of tax year 2018 (with tax returns filed in April 2019), interest is only deductible if the funds from the loan are used either to purchase, build, or significantly improve a primary or second home.
Unfortunately, if the proceeds of a second loan are being used to pay for post-secondary education, they are not tax-deductible.
Just because the idea of using your home equity to cover the cost of your college tuition sounds good, it doesn’t means it’s automatically going to happen. Much like getting your first mortgage on your home, you still have to qualify for a cash-out refinance. That means your lender is going to assess all sorts of facets surrounding your financial health, including your credit score, assets, and debts, among other things.
Lenders in Washington state typically require that borrowers have certain qualifications, including a credit score of at least 680, no more than 43% debt amounts relative to total income, and a relatively low loan-to-value ratio (LTV). Further, you’ll need to have at least 20% equity in your home before you qualify, although some lenders are allowing consumers to borrow with a little less than that.
Like any other type of loan, there are certain risks involved. When it comes to taking out a cash-out refinance, there’s always that risk that you could lose your home if you fail to make your payments on time on a regular basis, since your home is collateralizing the loan. Further, if the housing markets crumble and your home’s value drops, you could wind up underwater on your mortgage, which means you’d owe more than what your house is worth. That’s why it’s important to have a lot of equity in your home before taking out a cash-out refinance.
A cash-out refinance isn’t the only way to tap into the equity in your home. There are other products available that you may also want to consider, including a home equity line of credit (HELOC) or a home equity loan. Be sure to speak with your trusted mortgage specialist to help you determine which loan product is best for you.
These are a few of the factors that everyone needs to think about when trying to finance the cost of higher education. These decisions can have significant impacts on someone’s financial future.
A cash-out refinance can certainly be very useful to pay for college, as well as many other expensive things, such as car repairs or home renovations. But it’s a big financial commitment, so you’ll need to weigh its costs in WA before you apply.
Consult with your trusted home financing professional for a review of your personal situation. They can guide you through the process to make the best decision for your family.
Sammamish Mortgage is a local mortgage company serving the broader Pacific Northwest region, including Washington state, Idaho, Colorado, and Oregon. We are proud to offer a wide variety of mortgage programs and products with flexible qualification criteria. Please contact us if you have any questions or are ready to apply for a home loan.
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