Eliminate first mortgage

**zetta** · 08-24-2009, 06:12 PM

How often can the HELOC adjust and by how much? In general I would not advise trading a fixed rate for a variable rate -- even if it's limited to 1% per year, it could be up to 5.25% by Oct 2011.

**maat55** · 08-24-2009, 06:28 PM

I too am not comfortable with a variable rate, especially in the coming future. You very well could see rates adjust upwards dramatically. It is a guessing game I would not play.

Four or five years ago, I had to refi within tens months because rate adjusted so quickly.

**Taxplanr** · 08-24-2009, 06:35 PM

You may want to think about taking all the money out now while you can get a low fixed rate.

**terry1156** · 08-24-2009, 07:26 PM

I will go out on a limb and ask why you feel that you need to pay for your daughter's college? Especially all of it.

Using that money means that you won't have it for your retirement and since it seems this is the only way that you can raise it, I assume you don't have much in retirement funds (apologies if this is an incorrect assumption)

If I were in a similar situation, I would tell her that I was willing to pay for a small portion of it. She was responsible for the rest. She has plenty of time to work off debt, you have limited time to build your retirement.

There are plenty of ways she can cut the cost of college. If she went to junior college the first 2 years instead of a 4 year college, she could graduate at half the cost. It would also be a big incentive for her to really think about money and how much it is going to cost. There is no reason for her to do so if you are paying and none of that money is hers.

If this doesn't appeal to you, another approach would be to say she has a certain amount for college (say $60,000) and anything over that she must pay herself and if she can come under that, any extra money left over is hers. Then choosing the junior college route has the potential to net her $20,000 when she graduates while saving you $20,000 as well.

If she is old enough to go to college, she is old enough to begin having to make the hard financial decisions that come with being an adult.

**Bryan** · 08-24-2009, 08:35 PM

Wow! Thank you for all the good advice so quickly.

zetta, you asked how much and how often can the HELOC adjust. I do not know the answer as I haven't actually closed on the loan yet. But, very good questions I will ask. The HELOC is thru my credit union at work. I've had a $5000 HELOC there for the past several years (that's how I got my boat) and have not had issue with them constantly raising it year after year.

maat55, thank you for your opinion on not trading a fixed rate for a variable rate. It's an emotional issue. Eliminating my first mortgage has a great psychological appeal. But I need to make sure I make this decision without emotion.

Taxplanr, interesting concept about taking a one-time larger fixed amount at a fixed rate. Something like maybe $50,000. This is of course assuming I could get a fixed rate that is less than the 4.625% I have today on my first mortgage. Otherwise, wouldn't I just be going backwards?

terry1156, Thank you for keeping me grounded in the fact we should not be spoon feeding our children these elaborate educations with no responsibility of their own.

She will be expected to also have a job while going to school. She will also be taking out loans to cover some of the costs as well.

But, according to the financial aid office at the school she can only qualify for $1800 per quarter for the subsidized Stafford loan. Of course there are also the unsubsidized Stafford loans, Parent Plus loans, SELF loan and the Sallie Mae Smart Loan.

So, rather than run around trying to line up 3 or 4 different student loan options to cover the total cost, that all have their own up front loan processing fees and progressively worse interest rates and different rules on when and how much you need to start making payments, her mother and I opted to do this thru the equity in our home.

Maybe it is a bad decision. But, she wants to go to college. This is the college she wants. She already did 1 year at the local community college and was not happy. So, basically we pissed money away on a school she never even wanted to attend anyhow. At least with this school she is excited about attending.

**wincrasher** · 08-25-2009, 05:44 AM

HELOCs all have strange rules. You may be subject to the variable rate if you take the whole amount now or wait. People around the country are complaining that thier HELOCs are being terminated or reduced because home values keep falling.

It's admirable that you are wanting to pay for your daughter's college. That's part of the American Dream after all. Kudos to you. Too many kids are saddled with $100k debt for jobs that pay $20k to $30k a year.

But as others have said, don't go into debt at the expense of your retirement or financial security. It's better for the kid to have college debt than to have to take care of you financially later in life.

**arthurb999** · 08-25-2009, 06:47 AM

Is it a state school? Has she applied for any scholorships? Can she do work-study program? What is her major going to be?

**Joan.of.the.Arch** · 08-25-2009, 07:20 AM

She already did 1 year at the local community college and was not happy. So, basically we pissed money away on a school she never even wanted to attend anyhow.

I can understand not being real happy at one college or another. But why do you consider that money pissed away? Was the instruction no good? Did she learn nothing? Do her classes not transfer to the 4-year school? Did she take the wrong classes to transfer? Did she not pass her classes?.... If the money being pissed away was in anyway my daughter's fault, I would be extra hesitant to up the ante by re-mortgaging my house.

**zetta** · 08-25-2009, 02:11 PM

For purposes of discussion I'll assume that you've got your retirement fully funded through your 401k and possibly ROTH accounts and that your daughter has done all she can to obtain scholarships, etc, and that switching schools is the best choice for her. I'll also assume that your cash flow is sufficient to pay off these loans.

Just because the credit union hasn't raised rates on variable HELOCs in the last few years doesn't mean they won't do so in the future. The rate will be tied to some index, and if inflation hits it will go up. I agree with maat55 that the country is at high risk for going back into high inflation sometime within the next decade.

How long will it take you to pay off the $90k HELOC?

Instead of taking money from the HELOC to pay off your first mortgage, I would look into going the other direction. Take out $30k in HELOC at 3.25% variable to cover the first year of school. Refinance your first mortgage at a new fixed rate, taking out an additional $60k of equity to cover the remaining years of school, and place the money in CD's coming due when the tuition will be due.

Which path is better depends on what fixed rate you can get today, how often and how much the variable rate can adjust, and how long it will take you to pay off both loans.

If you take out most of the money using a variable rate, you are running the risk that inflation will make the rate go up to a point where you can't afford it.

If you take out most of the money at a fixed rate, you may pay a higher interest rate initially, but know that you are locked into a rate you can afford long-term.

If you're uncomfortable with the idea of taking $90k of equity out of your home, then you need to revisit whether you can afford to guarantee paying your daughter's education. The alternative is to let her take out the student loans in her name -- you can always direct the payments you would've made for the HELOC to her loan company.

**Bryan** · 08-26-2009, 08:14 AM

Everybody Thank you! This is all very good advice. Which is exactly why I posted my question here.

zetta, your comment about going the other way is intriguing. Doing just enough of the HELOC to cover the 1st year of college ($30,000). Then, refinance (cash out) the first mortage for $60,000 at a fixed rate.

If the HELOC rate rises, use part of the $60,000 to pay off the HELOC so that headache is gone. Put the rest into CD's that come due when tutition is due.

If the HELOC rate stays flat, put all (or most) of the $60,000 into CD's.

Although this solution is only attractive if I can refinance at a fixed rate at 4.625 or lower. If not, then I don't see how this is helpful.

The other down side I can see in this plan is that I will now have a $90,000 loan for most of the time period. Versus the HELOC that allows me to only dip into that bucket when and how much at my discretion. But, I guess that is the convience of a line of credit. Every convience has a cost.

Again, thank you all very much. This has been very helpful to talk this thru.

Bryan

**zetta** · 08-26-2009, 12:15 PM

The other down side I can see in this plan is that I will now have a $90,000 loan for most of the time period. Versus the HELOC that allows me to only dip into that bucket when and how much at my discretion. But, I guess that is the convience of a line of credit. Every convience has a cost.

I was thinking about this same point last night -- why pay an extra 3 years of interest on the money for her senior year?

It's a tough call -- might be worth visiting a certified financial planner to help you evaluate the options.

**Taxplanr** · 08-26-2009, 06:57 PM

If you have a very small balance left on your 1st mortgage you probably have very little left in terms of interest charges so the rate on that 1st does not really make a difference.

I am simply suggesting that getting a fixed rate at this point in time is a lot less riskier than having a floating rate over the course of the next 3 to 4 years or more to pay it off.

Actually taking the proceeds of a large loan and putting it in the bank could have a negative impact on the FAFSA so you would want a more comprehensive approach of what to do with the proceeds from the loan. This is beyond the scope of what I may suggest in a forum.

**anonymous_saver** · 08-27-2009, 09:00 AM

While I would not personally pay that large of a portion of their schooling, I will give advice based on what you have already decided.

If I were you, I would not go with the HELOC, it scares me that you are putting your home in danger for this. Instead I would go with the other school loans being offered to your daughter. You could take out PLUS loans for her, and even if it's at a higher interest rate, I think I'd consider that a safer bet. In addition, if she still needed additional money, you could always have it taken out in her name, and you could still make payments on those loans for her.

It also concerns me that this will hinder your other savings, particularly with retirement savings. What kind of retirement savings are you contributing?

**Goldy1** · 08-27-2009, 09:44 AM

In response to your "she excited about attending" this school. That is fine and dandy, but in reality you are not always excited about things. I have worked jobs I was generally less than excited to go to. lol.
My parents paid fo rmy college in cash. It was way cheaper in the late 90's, and I chose a lower rate public university. Good thing as I have never worked in my field. Sure, I am educated and well rounded, but I never got the chance to use the skills I learned. This is also a gamble. (however, if you go into, say nursing, it is safe to assume a job will be waiting for you)

Eliminate first mortgage