<p>After our D goes to college, we’re thinking about selling our home, and maybe not repurchasing another home immediately (rent for 1-2 years in another city). When applying for financial aid, home equity is not normally included as available-savings in the “federal method”. But what if you don’t reinvest your home equity immediately. Is there a “grace period”? At what time point would colleges consider it savings-to-be-tapped?</p>
<p>Well…if you don’t invest that home equity money in another property, it will be in some other kind of asset account (savings, CD, money market, or whatever). SO…at the very least that money would account for a substantial savings asset. I don’t believe there is a “grace period” on when you spend your savings. How would colleges know (or care for that matter…) where your savings money comes from and when you intend to spend it?</p>
<p>Most financial advisors recommend that you don’t sign a binding purchase and sale agreement on your next home until you have a binding P&S agreement on your current home (so as not to be stuck paying two mortgages). Not everybody is ideally able to time the sale of their old home with the purchase of their next. For financial piece of mind, many people rent temporarily while searching out their next home. It might only be for a summer - I can’t imagine that colleges are ready-to-pounce the moment the equity from current home lands in some saving account. My question is this - for the purposes of college financial aid/FAFSA – what is the grace period, if any? What if you wanted to rent for more than 12 months before finally deciding to plunk down your money on the next home?</p>
<p>Ive never heard of a grace period where investment money doesn’t count</p>
<p>Here is the issue…colleges use the amount of money in your savings or CD’s or whatever as assets when calculating finaid. Future purchases are NOT taken into consideration not even for homes. Simply put, someone <em>could</em> put the money from the sale of their home into savings saying they intended to purchase a home in a year or two…but there is nothing to guarantee or obligate them to do so. Colleges can’t wonder if/when you will spend your savings. If they did that, everyone applying for finaid would have some “future expense” their savings was earmarked for besides college expenses. If they allowed savings earned for “home equity” to be deferred as an asset, what about a family who has been saving for years for the down payment for their first home? Some would argue that THAT money should also be deferred as a college asset. If you don’t want the money from home equity to be in your “asset pool”, it would be best to reinvest before the finaid forms are filled out, OR time your sale/repurchase so that this is not an issue. You may want to contact someone who is a professional in this sort of dealing to see how this issue is handled. I have never heard about a grace period for finaid purposes but I’m not an expert…just a parent.</p>
<p>This just points up a feature (defect) of the current fin aid system. In order to keep the system simple: home equity doesn’t count, cash in the bank counts. So the key is to time home trades so the equity from the old house is not still in the bank on the day the FAFSA is filed. Keeping the equity around in the form of liquid assets for a couple years like the OP wants to do could be quite costly in the long run.</p>
<p>From a big picture view, the fin aid system could be much more complicated in order to address many more possible situations like OP’s, but then you would end up with something really complicated like the income tax laws. Imagine “Home Equity Carryforwards” or “Cash Investments Five Year Averaging.” And still loopholes.</p>