To Pay for Your Kid's College, HELOC or Refi?

Dear Dr. Don,

Is it better to finance my two children's college through a home refinance or by taking out an equity line of credit? What are the tax advantages/disadvantages of the two options? If I take a lump-sum payout by refinancing, where is the best place to put the money and write checks off it as needed for tuition?

-- Kelly Collegians

Dear Kelly,

First, take a look at your family's overall financial picture. Can you afford to take on this level of debt without derailing your plans for retirement? A college education isn't a birthright, and there's something to be said for the children having some "skin in the game" when it comes to being responsible for their college costs.

That said, assuming the children are at or near college age, I think a cash-out refinance is better in today's interest rate environment than a home equity loan. Bankrate's national average as of Feb. 2, 2012, for a 15-year fixed-rate mortgage is 3.34% and 4.12% for a 30-year fixed-rate mortgage. A home equity line of credit, or HELOC, is at 5.45%.

If you can find a deal on a HELOC, it might work out better. The advantage to the HELOC is that it has lower closing costs, and you don't have to take out the full credit line at closing. You can write checks against the credit line to pay the tuition bills. The disadvantage, besides the higher interest rate, is that it is at a variable rate that can go higher over time.

I'd rather see you lock in the low fixed rates and invest the cash until needed for college costs than pay the higher interest rate on the HELOC and put yourself at risk for even higher interest rates in the future.

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