Plus loans vs home equity/mortgage loans

calmom
Sat, 24 Apr 2010 18:04:03 +0000

whereas I can get a refi for 15 year fixed at 4.25 (or 4.75 with no closing costs). That makes a difference of 3.75 % which is substantial . My son is starting as a freshman this year and after scholarships and Stafford loans we still need about 26K/yr. I have about 250k in home equity and 10 yrs left on my current loan. I think it makes sense for me to refi with cash out of $100k to a 15 yr period as it would not impact my monthly outgo. Is it possible to get my son to co-sign the mortgage?



PLUS loan is 7.9% with federal direct lending.

If you borrowed $100K @ $25K/year with a PLUS loan, here is how the payments would work out:

Each year you would borrow $25K - and for each separate loan you would have monthly payments of roughly $300. Over the 10 year life of of each loan you will pay interest of roughly $11,250. That means for the 4 loans together, you would pay a $45K in interest on top of the $100K. Because the loans are staggered, you wouldn’t start paying on any until the year of distribution-- but after year 4 you will have monthly payments of roughly $1200 on top of whatever your current mortgage payments are.

On the other hand, if you refi your house over 15 years cashing out $100K, at 4.25%, the payments on the $100K will begin immediately. I don’t know what else you owe on your house, but the portion of your payment attributable to that $100K will be roughly $750 a month and over the 15 year life of the loan you will have paid roughly $35K in interest.

I didn’t account for either loan origination fees or mortgage interest costs in the above example.

But here are some added points:

In year 1, with the PLUS, you are paying out $300 – whereas the refi you are paying $750. Because of the higher payment on the refi, you’ve made cumulative payments of $9000 that first year, including almost $4200 in interest. If you had taken the PLUS loan, because the first payments aren’t due until after the final distribution for the year, during the first year your payments would have been roughly $1800, plus whatever interest was accumulated for the first semester’s distribution of $12,500.

So with that savings maybe you don’t need to borrow so much on the PLUS loan. Instead of the refi, what happens if you pay an additional $5K up front toward tuition and only borrow $20K on the PLUS loan? Your out-of-pocket for the year is actually less - your PLUS payment drops to $240 per month, and you save $2100 in interest over the life of the loan.

Also, think about this – you mentioned Stafford loans for your son. Are they subsidized? If so, will he still qualify for a subsidized Stafford loan in year #2 of college, when you fill out the FAFSA in January and have an extra $75K sitting in the bank?

Finally – you asked whether you can get your son to co-sign on the mortgage. Based on that question, I think you should forget the whole thing and have your son attend a college you can afford. Why? Because I think you want your son to take on the part that is considered to be parental responsibility. I know that many parents don’t see it that way, but the financial aid system and parent loan system is structured with that assumption – NO KID, EVER should be BORROWING $100K for their UNDERGRAD education. If you want your son as a cosigner, you are shifting a burden to him that probably shouldn’t be taken on in the first place.