HELOC vs. Parental Student Loans vs. Second Mortgage?
"Thank God you have your child back, it is so awesome that you finally found a medical treatment that worked.  It must have been a truly trying time in your lives.   That situation is an important template in personal finance.  Through no fault of your own, a series of events occurred that caused you to spend far more money then you anticipated.  Per your post this was complicated by lost income due to economic situations.   What is to say that this does not happen again in the future?  While we can all hope that our child does not get sick, there are other events that could also fit into this template. Because of this I hate all options you present.  Per your post, you are pretty thin with free cash flow and have high income, and yet you are looking to borrow more.  That is a recipe for disaster with it being made worse as you are considering putting your home at risk. The 20K per year per kid sounds like a live at the university state school; or, a close by private school.  Your finances do not support either option.  There are times when the word ""No"" is in order when answering questions.   Doing a live at home community college to university will cost you a total of about 30K per kid rather than the 80K you are proposing.  Doing this alone will greatly reduce the risk you are attempting to assume.  Doing that and having your child work some, you could cash flow college.  That is what I would recommend. Given that you are so thin, you will also have to put constraints on college attendance.  No changing major three times, only majors with an employable skills, and studying before partying.  It may be worth it to wait a year of two before attending if a decision cannot be made. I was in a similar situation when my son started college.  High income, but broke.  He worked and went to a community college and was able to pay for the bulk of it himself.  From there he obtained a job with a healthy salary and completed his degree at the University.  It took him a little longer, but he is debt free and has a fantastic work ethic." I'd like to propose a 4th option: Let your kid(s) take out their own student loans, and then you can make payments directly to help them pay them down. Some advantages to this method: Note the many similarities to the HELOC, which would probably be my second choice. Debt is no fun. Getting out of debt to replace it with more debt is no fun. In both cases, you are making an investment in your child's future. That's laudable, but there might be other ways to economize on the education costs. I prefer HELOC debt because I can deduct the interest (as you pointed out) and it usually allows re-borrowing if other cash-flow problems crop up. The downside of borrowing against your house is that your house could be foreclosed if you become insolvent, and you will lose your buffer if you max out the equity now. The same problem exists with a 2nd mortgage. The fact that you would still have a mortgage either way does make the option more attractive though (or less unattractive anyway). "First of all, I'm happy that the medical treatments were successful. I can't even imagine what you were going through.  However, you are now faced with a not-so-uncommon reality that many households face. Here's some other options you might not have thought of:   I would avoid adding more debt if at all possible.  I would first focus on the the cost side.  With a good income you can also squeeze every last dollar out of your budget to send them to school.   I agree with your dislike of parent loans for the same reasons, plus they don't encourage cost savings and there's no asset to ""give back"" if school doesn't work out (roughly half of all students that start college don't graduate) I would also avoid borrowing more than 80% of your home's value to avoid PMI or higher loan rates.  You also say that you can pay off the HELOC in 5 years - why can you do that but not cash flow the college?   Also note that a second mortgage may be worse that a HELOC - the fees will be higher, and you still won't be able to borrow more that what the house is worth."
It's an issue of how much of a safety net you want, and part of that is going to be how much of a safety net you have in other areas. You should take into account what regular expenses you have, what emergency expenses you might have, what insurance policies you have, what deductibles those policies have, and what sources of money you have. As Alex B says, a HELOC isn't a guaranteed source of money, but it is one contingency. If you have a large amount of equity and your local real estate market is stable, your bank could cancel your HELOC, but they would have no financial incentive to do so. Other possible safety nets to consider would be friends and family, credit cards, and loans backed by retirement funds. Obviously you shouldn't rely on the last two for everyday expenses, but it's reasonable to consider them as contingencies in true emergencies.  Also, if you have a significant net worth, home equity and savings account should not be the only places you're storing your wealth. Look into stocks, bonds, and money market accounts. Your expected returns in the stock market should be higher than the interest you're paying on the HELOC. Stocks are more risky and obviously you shouldn't put all your savings there, but it is one more basket to put your eggs in, and unlike a savings account your money isn't just sitting there. Timo's concern may be accurate, but talking to the bank is the next step.  If I am the banker, I'm happier that (a) there's 25% down, and (b) it's not an additional loan as some might get from a parent.  It's not that your parents have a lien for the 25% as a lender would, the structure is ownership, they own 25%. An important, if not obvious, distinction.  Timo is right that as an asset of the parents, the ownership stake is at risk if their finances run into issues. Other than that, so long as all is done above board, your proposal can work. The bank will want your parents to sign the note of course, you can't mortgage property you don't fully own. First, don't borrow any more money.  You're probably bankrupt right now at that income level.  2k/month is poverty level income, especially in some of the higher cost of living areas of California.  At $2k per month of income, and $1300 of rent and utilities, you've only got 700 a month for food.  The student loans are probably in deferment while your husband is in school.  If so, keep them that way and deal with them when he lands a career track goal after grad school.   The car loan is more than you can afford.  Seriously consider selling the car to get rid of the note.  Then use the cash flow that was going to the car loan to pay off the 'other' debt.  A car is usually a luxury, but if it is necessary, be sure it is one that doesn't include a loan.   Budget all of your income (consider using YNAB or something like it).  Include a budget item to build an emergency fund.  Live within your means and look for ways to supplement your income.  With three of your own, you'd probably make an excellent baby sitter. As for the inheritance, find a low risk, liquid investment, such as 12 month CDs or savings bonds.  Something that you can liquidate without penalty if an emergency arises.  Save the money for if you get into a situation where there is no other way out.  Hopefully you can have your emergency fund built up so that you don't need to draw on the inheritance.   Set a date, grad school + landing + 90 days.  If you reach that date and haven't had to use the inheritance, and you have a good emergency fund, put the inheritance in a retirement fund and forget about it. Why retirement fund and not a college fund for the kids?  The best gift you can give them is to remain financially independent throughout your life.  If you get to the point where you are fully funding your tax advantaged retirement savings, and you are ready to start wealth-building, that is the time to take part of that cash flow and set it aside for college funds. "I'll start by focussing on the numbers. I highly recommend you get comfortable with spreadsheets to do these calculations on your own.  I assume a $200K loan, the mortgage for a $250K house. Scale this up or down as appropriate. For the rate, I used the current US average for the 30 and 15 year fixed loans. You can see 2 things. First, even with that lower rate to go 15 years, the payment required is 51% higher than with the 30. I'll get back to that. Second, to pay the 30 at 15 years, you'd need an extra $73. Because now you are paying at a 15 year pace, but with a 30 year rate. This is $876/yr to keep that flexibility. These are the numbers.  There are 2 camps in viewing the longer term debt. There are those who view debt as evil, the $900/mo payment would keep them up at night until it's gone, and they would prefer to have zero debt regardless of the lifestyle choices they'd need to make or the alternative uses of that money. To them, it's not your house as long as you have a mortgage. (But they're ok with the local tax assessor having a statutory lien and his hand out every quarter.) The flip side are those who will say this is the cheapest money you'll ever see, and you should have as large a mortgage as you can, for as long as you can. Treat the interest like rent, and invest your money.  My own view is more in the middle. Look at your situation. I'd prioritize  In my opinion, it makes little sense to focus on the mortgage unless and until the first 5 items above are in place. The extra $459 to go to 15? If it's not stealing from those other items or making your cash flow tight, go for it.  Keep one subtle point in mind, risk is like matter and energy, it's not created or destroyed but just moved around. Those who offer the cliche ""debt creates risk"" are correct, but the risk is not yours, it's the lender's. Looking at your own finances, liquidity is important. You can take the 15 year mortgage, and 10 years in, lose your job. The bank still wants its payments every month. Even if you had no mortgage, the tax collector is still there. To keep your risk low, you want a safety net that will cover you between jobs, illness, new babies being born, etc.  I've gone head to head with people insisting on prioritizing the mortgage payoff ahead of the matched 401(k) deposit. Funny, they'd prefer to owe $75K less, while that $75K could have been deposited pretax (so $100K, for those in the 25% bracket) and matched, to $200K. Don't make that mistake." "Concise answers to your questions: Depends on the loan and the bank; when you ""accelerate"" repayment of a loan by applying a pre-payment balance to the principal, your monthly payment may be reduced. However, standard practice for most loan types is that the repayment schedule will be accelerated; you'll pay no less each month, but you'll pay it off sooner. I can neither confirm nor deny that an internship counts as job experience in the field for the purpose of mortgage lending. It sounds logical, especially if it were a paid internship (in which case you'd just call it a ""job""), but I can't be sure as I don't know of anyone who got a mortgage without accruing the necessary job experience post-graduation. A loan officer will be happy to talk to you and answer specific questions, but if you go in today, with no credit history (the student loan probably hasn't even entered repayment) and a lot of unknowns (an offer can be rescinded, for instance), you are virtually certain to be denied a mortgage. The bank is going to want evidence that you will make good on the debt you have over time. One $10,000 payment on the loan, though significant, is just one payment as far as your credit history (and credit score) is concerned. Now, a few more reality checks: $70k/yr is not what you'll be bringing home. As a single person without dependents, you'll be taxed at the highest possible withholdings rate. Your effective tax rate on $70k, depending on the state in which you live, can be as high as 30% (including all payroll/SS taxes, for a 1099 earner and/or an employee in a state with an income tax), so you're actually only bringing home 42k/yr, or about $1,600/paycheck if you're paid biweekly. To that, add a decent chunk for your group healthcare plan (which, as of 2014, you will be required to buy, or else pay another $2500 - effectively another 3% of gross earnings - in taxes). And even now with your first job, you should be at least trying to save up a decent chunk o' change in a 401k or IRA as a retirement nest egg. That student loan, beginning about 6 months after you leave school, will cost you about $555/mo in monthly payments for the next 10 years (if it's all Stafford loans with a 50/50 split between sub/unsub; that could be as much as $600/mo for all-unsub Stafford, or $700 or more for private loans). If you were going to pay all that back in two years, you're looking at paying a ballpark of $2500/mo leaving just $700 to pay all your bills and expenses each month. With a 3-year payoff plan, you're turning around one of your two paychecks every month to the student loan servicer, which for a bachelor is doable but still rather tight. Your mortgage payment isn't the only payment you will make on your house. If you get an FHA loan with 3.5% down, the lender will demand PMI. The city/county will likely levy a property tax on the assessed value of land and building. The lender may require that you purchase home insurance with minimum acceptable coverage limits and deductibles. All of these will be paid into escrow accounts, managed by your lending bank, from a single check you send them monthly. I pay all of these, in a state (Texas) that gets its primary income from sales and property tax instead of income, and my monthly payment isn't quite double the simple P&I. Once you have the house, you'll want to fill the house. Nice bed: probably $1500 between mattress and frame for a nice big queen you can stretch out on (and have lady friends over). Nice couch: $1000. TV: call it $500. That's probably the bare minimum you'll want to buy to replace what you lived through college with (you'll have somewhere to eat and sleep other than the floor of your new home), and we're already talking almost a month's salary, or payments of up to 10% of your monthly take-home pay over a year on a couple of store credit cards. Plates, cookware, etc just keeps bumping this up. Yes, they're (theoretically) all one-time costs, but they're things you need, and things you may not have if you've been living in dorms and eating in dining halls all through college. The house you buy now is likely to be a ""starter"", maybe 3bed/2bath and 1600 sqft at the upper end (they sell em as small as 2bd/1bt 1100sqft). It will support a spouse and 2 kids, but by that point you'll be bursting at the seams. What happens if your future spouse had the same idea of buying a house early while rates were low? The cost of buying a house may be as little as 3.5% down and a few hundred more in advance escrow and a couple other fees the seller can't pay for you. The cost of selling the same house is likely to include all the costs you made the seller pay when you bought it, because you'll be selling to someone in the same position you're in now. I didn't know it at the time I bought my house, but I paid about $5,000 to get into it (3.5% down and 6 months' escrow up front), while the sellers paid over $10,000 to get out (the owner got married to another homeowner, and they ended up selling both houses to move out of town; I don't even know what kind of bath they took on the house we weren't involved with). I graduated in 2005. I didn't buy my first house until I was married and pretty much well-settled, in 2011 (and yes, we were looking because mortgage rates were at rock bottom). We really lucked out in terms of a home that, if we want to or have to, we can live in for the rest of our lives (only 1700sqft, but it's officially a 4/2 with a spare room, and a downstairs master suite and nursery/office, so when we're old and decrepit we can pretty much live downstairs). I would seriously recommend that you do the same, even if by doing so you miss out on the absolute best interest rates. Last example: let's say, hypothetically, that you bite at current interest rates, and lock in a rate just above prime at 4%, 3.5% down, seller pays closing, but then in two years you get married, change jobs and have to move. Let's further suppose an alternate reality in which, after two years of living in an apartment, all the same life changes happen and you are now shopping for your first house having been pre-approved at 5%. That one percentage point savings by buying now, on a house in the $200k range, is worth about $120/mo or about $1440/yr off of your P&I payment ($921.42 on a $200,000 home with a 30-year term). Not chump change (over 30 years if you had been that lucky, it's $43000), but it's less than 5% of your take-home pay (month-to-month or annually). However, when you move in two years, the buyer's probably going to want the same deal you got - seller pays closing - because that's the market level you bought in to (low-priced starters for first-time homebuyers). That's a 3% commission for both agents, 1% origination, 0.5%-1% guarantor, and various fixed fees (title etc). Assuming the value of the house hasn't changed, let's call total selling costs 8% of the house value of $200k (which is probably low); that's $16,000 in seller's costs. Again, assuming home value didn't change and that you got an FHA loan requiring only 3.5% down, your down payment ($7k) plus principal paid (about another $7k; 6936.27 to be exact) only covers $14k of those costs. You're now in the hole $2,000, and you still have to come up with your next home's down payment.  With all other things being equal, in order to get back to where you were in net worth terms before you bought the house (meaning $7,000 cash in the bank after selling it), you would need to stay in the house for 4 and a half years to accumulate the $16,000 in equity through principal payments. That leaves you with your original $7,000 down payment returned to you in cash, and you're even in accounting terms (which means in finance terms you're behind; that $7,000 invested at 3% historical average rate of inflation would have earned you about $800 in those four years, meaning you need to stick around about 5.5 years before you ""break even"" in TVM terms). For this reason, I would say that you should be very cautious when buying your first home; it may very well be the last one you'll ever buy. Whether that's because you made good choices or bad is up to you." I am a real estate agent. I know you are in Canada, but will let you know that in the US, agents are not to supposed to offer this kind of advice. They can refer you to a bank or mortgage broker, but should not be giving this type of financial advice.  That said, it's a HELOC, it would be rare for your bank to be willing to just add to your mortgage at the current low rate. Still, ask the bank holding your loan.  Is the second home to rent out or a vacation/summer home for you to live in? "I'll assume you live in the US for the start of my answer - Do you maximize your retirement savings at work, at least getting your employer's match in full, if they do this. Do you have any other debt that's at a higher rate?  Is your emergency account funded to your satisfaction? If you lost your job and tenant on the same day, how long before you were in trouble?  The ""pay early"" question seems to hit an emotional nerve with most people. While I start with the above and then segue to ""would you be happy with a long term 5% return?"" there's one major point not to miss - money paid to either mortgage isn't liquid. The idea of owing out no money at all is great, but paying anything less than ""paid in full"" leaves you still owing that monthly payment. You can send $400K against your $500K mortgage, and still owe $3K per month until paid. And if you lose your job, you may not so easily refinance the remaining $100K to a lower payment so easily.  If your goal is to continue with real estate, you don't prepay, you save cash for the next deal. Don't know if that was your intent at some point.  Disclosure - my situation - Maxing out retirement accounts was my priority, then saving for college. Over the years, I had multiple refinances, each of which was a no-cost deal. The first refi saved with a lower rate. The second, was in early 2000s when back interest was so low I took a chunk of cash, paid principal down and went to a 20yr from the original 30. The kid starts college, and we target retirement in 6 years. I am paying the mortgage (now 2 years into a 10yr) to be done the month before the kid flies out. If I were younger, I'd be at the start of a new 30 yr at the recent 4.5% bottom. I think that a cost of near 3% after tax, and inflation soon to near/exceed 3% makes borrowing free, and I can invest conservatively in stocks that will have a dividend yield above this. Jane and I discussed the plan, and agree to retire mortgage free." What you haven't mentioned is the purchase risk.  You say that she will buy but then say you will be on the loan. If you are on the loan, essentially you will be purchasing a rental property and renting to your mother.  So that is the analysis you need to consider. You need to be financially able to take on this purchase and be willing to be a landlord. The ten year timeline looks good on paper. This may not be realistic, especially with an aging parent.  What if after 4 years, she can't stay in that condo?  What renting buys is flexibility. If she needs money for any reason, it is not tied up in an asset and unavailable. She is able it move if necessary. If she won't need the money, she should buy in cash. That, by far, gives her the best deal. The biggest issue I can see is that in order to have your parents protected properly, they'll have to register an interest in the property (ie, the 25%). I can't see the mortgage lender being too happy to have a second lienholder on the house for a total of 100% of the purchase price. Usually their conditions state that they'll need to be informed of other debts secured on the house and might actually have a say in that. Another way of accomplishing this is putting your parents on the house's deeds but that might also complicate matters with the lender and cause additional problems when it comes to selling the property. Not to mention that if anything bad happens to your parents, their stake in your property would be counted as one of their assets and you might find yourself in the situation where you have to come up with 25% of the property value right now or you might find that you have to sell the property to the first bidder simply because you do need the money as quickly as possible. Personally I wouldn't do it (especially without legal advice), the legal structure can be a nightmare and you'll just end up painted into a corner. Have you looked at conventional financing rather than VA?  VA loans are not a great deal.  Conventional tends to be the best, and FHA being better than VA.  While your rate looks very competitive, it looks like there will be a .5% fee for a refinance on top of other closing costs.   If I have the numbers correct, you are looking to finance about 120K, and the house is worth about 140K.  Given your salary and equity, you should have no problem getting a conventional loan assuming good enough credit.   While the 30 year is tempting, the thing I hate about it is that you will be 78 when the home is paid off.  Are you intending on working that long?  Also you are restarting the clock on your mortgage.  Presumably you have paid on it for a number of years, and now you will start that long journey over. If you were to take the 15 year how much would go to retirement?  You claim that the $320 in savings will go toward retirement if you take the 30 year, but could you save any if you took the 15 year? All in all I would rate your plan a B-.  It is a plan that will allow you to retire with dignity, and is not based on crazy assumptions.  Your success comes in the execution.  Will you actually put the $320 into retirement, or will the needs of the kids come before that?  A strict budget is really a key component with a stay at home spouse. The A+ plan would be to get the 15 year, and put about $650 toward retirement each month.  Its tough to do, but what sacrifices can you make to get there?  Can you move your plan a bit closer to the ideal plan? One thing you have not addressed is how you will handle college for the kids.  While in the process of long term planning, you might want to get on the same page with your wife on what you will offer the kids for help with college.  A viable plan is to pay their room and board, have them work, and for them to pay their own tuition to community college.  They are responsible for their own spending money and transportation.   Thank you for your service. You are thinking about this very well.  With option one, you need to think about the 5 D's in the contract.  What happens when one partner becomes disinterested, divorced (break up), does drugs (something illegal), dies or does not agree with decisions. One complication if you buy jointly, and decide to break up/move, on will the other partner be able to refinance?  If not the leaving person will probably not be able to finance a new home as the banks are rarely willing to assume multiple mortgage risks for one person.  (High income/large down payment not with standing.) I prefer the one person rents option to option one.  The trouble with that is that it sounds like you are in better position to be the owner, and she has a higher emotional need to own.    If she is really interested in building equity I would recommend a 15 year or shorter mortgage.  Building equity in a 30 year is not realistic. Sounds like baloney to me. HELOCs are variable rate, so you are paying down the principal of a fixed rate loan with a variable rate loan. If you want to pay the mortgage down faster, make two half payments per month, and/or add a little extra to each payment (make sure with the bank that any extra will automatically go to principal). "Banks are currently a lot less open to 'creative financing' than they were a few years ago, but you may still be able to take advantage of the tactic of splitting the loan into two parts, a smaller 'second mortgage' sometimes called a 'purchase money second' at a slightly higher interest rate for around 15-20% of the value, and the remaining in a conventional mortgage.  Since this tactic has been around for a long time, it's not quite in the category of the shenanegans they were pulling a few years back, so has a lot more potential to still be an option.  I did this in for my first house in '93 and again in '99 when I moved to a larger home after getting married.  It allowed me to get into both houses with less than 20% down and not pay PMI. This way neither loan is above 80% so you don't have to pay PMI.  The interest on the second loan will be higher, but usually only a few percent, and is thus usually a fraction of what you were paying for the PMI. (and it's deductible from your taxes) If you've been making your payments on time and have a good credit rating, then you might be able to find someone who would offer you such a deal.  You might even be able to get a rate for your primary that is down in the low 4's depending on where rates are today and what your credit rating is like.   If you can get the main loan low enough, even if the other is like say 7%, your blended rate may still be right around 5% If you can find a deal like this, it's also great material to use to negotiate with your current lender ""either help me get the PMI off this loan or I'm going to refinance.""  Then you can compare what they will offer you with what you can get in a refinance and decide what makes the most sense for you.  On word of warning, when refinancing, do NOT get sucked into an adjustable rate mortgage.  If you are finding life 'tight' right now with house payments and all, the an ARM could be highly seductive since they often offer a very low initial rate.. however then invariably adjust upwards, and you could suddenly find yourself with a monster payment far larger than what you have now.  With low rates where they are, getting a conventional fixed rate loan (or loans in the case of the tactic being discussed here) is the way to go." Yes, one is certainly better than the other. Which one depends on your priorities and the interest and tax rates on your student loan, your savings, and your (future) mortgage plus how much you can afford to save and still enjoy the lifestyle you want as well as how soon you want to move out. Basically, you havn't given enough information. A home equity loan (not a HELOC home equity line of credit) typically comes with far lower fees, but a slightly higher rate.  As rates fell over the last decade, I saw a choice of the Equity Loan with no cost at all, or a refinance with a few thousand in closing costs. We refinanced 3 times with the home equity loan, the last one was 5%. As the 15 year regular mortgage hit 3.5%, it seemed worth the costs, about $1800, to get the low rate, and expecting that rates would go lower. The 1.5% savings on the balance put our breakeven at fewer than 6 months.  If you truly meant HELOC, the variable aspect is the risk, as rates how little room down from here, but much room to rise.