Dear Dr. Don,
I have 5.8 years left on a 15-year mortgage for $90,000 at an interest rate of 5.699%. I was thinking of using my home's equity and doing a cash-out refinance at 2.875% for $80,000 with a loan term of 10 years. The balance on my current mortgage is about $44,000. Closing costs would be around $2,500. I would use the cash from the refinancing to help my daughter pay for college. I don't want to utilize the money I have managed to save over the years because I am 52, single, have equity in my home and need to think about my retirement as well. Thanks.
--Millie Matriculation

Dear Millie,
You don't say how much your home is worth, and that will be a factor in a lender's decision to let you use your home's equity. A first-mortgage lender will want a loan-to-value on the property of no more than 80% of the appraised value, or the lender will require private mortgage insurance, or PMI, which adds to your cost. So the home has to appraise for at least $100,000.

You do need to think about retirement, and that's a good reason to keep the loan term short on the refinancing. Paying off the house prior to retirement is a sound financial goal. I do agree with you that it makes more sense to do a cash-out refinance than it does to raid your retirement savings to help your daughter pay for college.

Sit down with her and discuss her plans for college, the costs, what you're willing to pay for and what you're expecting her to contribute. If she needs to take out student loans to pay for college, the first place to start is with the federal direct student loan program. The federal student loans will offer her the most flexibility when it comes to consolidation, deferment and forbearance.

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