PLUS Loan, 2nd Mortgage, H.E. Credit Line

<p>What, What, What! the best option if you've got about 120K home equity and college is going to cost about 90K (4 years). Can you write off the interest on a H.E. line of credit as well as a second mortgage? If so wouldn't the PLUS Loan be a bad option. Meeting with an Financial Planner next week.. just wanted to get a head start and pick all the fertile, flexible, financial brains out there. Any advise would be appreciated.</p>

<p>Nightingale - I'm just going to bump this up a bit in hopes that one of CC's financial experts can help. Your FP should be able to help with this issue, but I understand your desire to collect some info before your meeting. Good luck.</p>

<p>Not a Financial Planner, but if you "qualify" for the Alternative Minimum Tax, you can not deduct the interest from a HELOC that is used for paying education expenses (not sure about a 2nd mortgage).</p>

<p>There is NO best alternative. There are good alternatives for different assumptions. </p>

<p>There is only one guarantee that anyone/any company can give: CHANGE will happen.</p>

<p>I'd be pleased if you can post what this FP says. Keep us informed.</p>

<p>Mortgage loan(1st, 2nd, revolving credit) is tax deductible. Yes, to qualify it should be used for home improvement, but most people do deduct anyway. It is not restricted by AMT. Most mortgage rates are compatible to student loans, but student loans are not deductible for most of us. With mortgage loan, you also have longer term to pay it off. The only issue is that you couldn't transfer mortgage loan to your kid, whereas students loan you could.</p>

<p>My rule of thumb is that if I have to have any debt, it would be mortgage. It is the cheapest. Most of us do not stay in our home for more than 5 years. It is always better to choose the safest, lowest payment type for mortgage.</p>

<p>oldfort - "most of us do not stay in our home for more than 5 years"...did you really mean to say this? Makes no sense.</p>

<p>What I wanted to say was that most people move from one house to another within 5 years. I think that is pretty accurate. I used to use 20% prepayment rate when pricing mortgages. There is a lot of mobility within US under normal environment, of course when there is down turn less people will move around, and it also varies from one region to another.</p>

<p>Student loan interest, including interest on PLUS loans, is deductible at lower-to-moderate income levels. </p>

<p>Some lenders offer up to 2% interest rate reductions on a PLUS loan, and the rate is fixed; a HELOC with an adjustable rate can be more risky.</p>

<p>If you lose your job, the mortgage company won't care -- but the PLUS loan can be deferred.</p>

<p>If you become permanently disabled... or you die... or your kid dies... -- you (or your heirs) still have to pay the HELOC... but the PLUS is canceled.</p>

<p>If for some reason you can't keep up with payments and you miss a series of payments on your PLUS loan, it will mess up your credit and you probably will have a lot of annoying phone calls from the lender..... but you won't lose your house. The PLUS lenders can send you threatening mail and they can sue you, but they can't foreclose. </p>

<p>The PLUS loan is amortized to be paid off fully over its stated term; HELOC's often are not amortized for payoff, and may have a balloon payment in the end. While you are following oldfort's advice to choose the lowest payment with the idea that you will probably move anyway... you are paying mostly interest without reducing the debt -- so you will still owe the money and pay it out of proceeds of sale if and when you do move. If you are living in an area where real estate values are declining you could find yourself owing more than the house is worth. (I wonder how oldfort feels about subprime loans?.....)</p>

<p>With a HELOC you may have to pay for an appraisal and other loan generation fees, and may have to pay points; a PLUS will have a loan origination fee that is set at a small percentage of the total.</p>

<p>There is no prepayment penalty if you want to pay off a PLUS loan early and you can always use a HELOC to pay off the PLUS; but you can't do the same in reverse. </p>

<p>If you are looking at the short term -- what you have to pay each month -- then the HELOC may look better. Looking at the long term or your overall financial security/net worth -- that might not be the case. The best way to save money on a loan is to pay it off as quickly as possible -- the longer you pay interest, the more expensive it is. </p>

<p>Obviously every person's case is unique and for many families the HELOC may be the best way to go. I'm happy with my PLUS loans for now.</p>

<p>I don't like subprime loans.:)</p>

<p>Here is a good link:</p>

<p><a href=""&gt;;/a&gt;&lt;/p>

<p>FYI - you could purchase insurance for your mortgage loans to cover disability, death, etc. Figure out the cost of the insurance plus saving of monthly payment (after tax deduction) is cheaper than PLUS.</p>

<p>It depends on where you live, how much equity you have, and what type of mortgage you could get. </p>

<p>I am not an expert on PLUS, but am fairly familiar with mortgages. I just did a bit of research - currently PLUS loan is around 8-9% vs 6-7%(before tax) for 2nd mortgage or HEL, and PLUS charges 3%(3pts) loan fee vs possible 0% or fee waived for mortgages.</p>

<p>another option is to refi with today's low rates, taking out equity to pay for college. Of course, the liquid equity becomes an asset of which 5.6% goes to efc. </p>

<p>Any thoughts?</p>

<p>I would be careful with refi....depends on how much equity the person has. Obviously the market is still falling a bit and I wouldn't want to see anyone in a situation where they owe more than the house is worth. Calmom's comments are very important...there is no forgiveness on the HELOC.</p>

<p>I didn't mean to be pro or con -- I was just raising a number of issues that might favor the PLUS. A PLUS is 8.5% interest, fixed --but my lender gives me a 2% discount when I sign up for automatic withdrawal -- so I'll be paying 6.5%. Advertised rates for HELOC's are tricky because you don't always qualify for the best rate -- if you know what you are doing and have excellent credit you can shop around, but other factors can mean you are paying a much higher interest rate. </p>

<p>I think for a family that already has a HELOC set up the equation is a little different, since that avoids extra fees or any administrative hassle. </p>

<p>I personally have opted for the PLUS because the lenders are very easy to deal with -- no issues with documentation for approval; they run a credit check and send you the promissory note. You also get some free money/delayed interest with a PLUS -- you don't pay anything (either interest or payments) until after the 2nd disbursement --so your first payment on the sums you borrow each year isn't due until February or March. I haven't done the math on that, but that's about 6 months' interest free - which would be roughly $300 savings on a $10,000 loan. </p>

<p>Unlike oldfort, I won't be moving soon - I'd like to pay off my home over the next dozen years so I as to either reduce my expenses (no house payment) when I reach retirement age, or else to have a nice nest egg -- so I want to preserve and increase my home equity, not borrow against it.</p>

<p>I understand in borrowing against your home you place it at risk but the fact that you get a lower rate AND the ability to write of some of what you borrow seems like a great option. I always thought that anyone to whom you owed money could place a lean on your home.. so I don't think you're bullet proof with a PLUS loan you cannot, for some unfortunate reason pay.... are you?</p>

<p>Oldfort stated: "Mortgage loan(1st, 2nd, revolving credit) is tax deductible. Yes, to qualify it should be used for home improvement, but most people do deduct anyway. It is not restricted by AMT."</p>

<p>I would be careful with that. Yes, most people deduct all of their home mortgage interest, but technically it has to be used for home purchase or improvement to be deductible for AMT purposes. If your return would be audited (pretty small odds), the portion used for education would be disallowed for AMT. Just something to keep in mind for those who are close to being in AMT.</p>

<p>"There are good alternatives for different assumptions."</p>

<p>I'd agree with this. With the exception of loan sharks I've used virtually all types of loans in my lifetime --- they all look pretty much the same when you actually intend to repay the money! Depending on circumstances I think a case can be built for PLUS or HELOC or mortgage loans. Our family dynamics precluded the use of PLUS loans, but that was just our situation.</p>

<p>I agree with the description that calmom did above and favor PLUS loans. Different people have different situations and the other options might be better for them. At least they are available.
Here's another reason I favor PLUS loans: while the principal will increase [double each year if the EFC stays the same] over 4 years of borrowing and monthly payments will double as well reaching levels close or maybe even higher than a HELOC or HEL, at least you'll be done paying it in 13 years. After 10 years, when you finish paying the first loan, your payments will start decreasing.
Another option is to consolidate your loans accumulated in 4 years into a single loan after grad school. Usually that implies a lower %rate, lower monthly payments, but an increased period of repayment. At least you have this option as compared to a HEL where your payments will stay the same for the term [most likely 30 years].
And you can still have the option to get a HEL later when the housing market will start to regain value if you don't like the PLUS/consolidated terms.</p>

<p>How little do you have to earn to avoid the AMT this year?</p>

<p>PLUS loans are guaranteed to have the lender repaid. You may then get hounded to the grave by the insurer and your assets seized on your death, or your wages garnished, but no your house can not be seized. The PLUS fine print is fairly simple and can be found at all PLUS lenders.</p>

<p>Nightingale, I'm no tax adviser, but as someone who had to fork out AMT a couple of times, I can tell you that it is the "non-earned" parts of your tax refund that can most likely trigger AMT (eg if you buy incentive stock options and do not sell them in the same year, that's an AMT event).</p>

<p>I found books by Kaye Thomas very helpful when I was trying to navigate the options and AMT labyrinth:</p>

<p><a href=""&gt;;/a&gt;&lt;/p>

Q: How do I know if I have to worry about the AMT?</p>

<p>A: Unfortunately, there's no good answer to this common question — which is one of the big problems with the AMT. You can have AMT liability because of one big item on your tax return, or because of a combination of many small items. Some things that can contribute to AMT liability are mundane items that appear on many tax returns, such as a deduction for state income tax or interest on a second mortgage, or even your personal and dependency exemptions.


<p>^Funny, we pay AMT every year and I still don't know why. We have zero deductions except the standard deduction for 4 people. We have no mortgage, nothing on that list above.</p>