Home equity may affect college aid options

Q: Our son has just started his senior year in high school, but we have already received the various forms to fill out so we can try to get some financial aid to send him to college. Our home is worth about $150,000 more than what we paid for it several years ago. Will this affect our family’s ability to get the most financial aid possible?

A:It depends largely on which college or university your son hopes to attend.

While some schools don’t expect parents to use their home equity to help pay for tuition and additional college costs, other institutions indeed will reduce the amount of financial aid they’ll offer if the family home is worth much more than Mom and Dad paid for it.

Unfortunately, there’s no list available that shows which colleges consider home equity when calculating their financial-aid packages and which schools do not.

But the majority of public schools, including most state universities, do not consider the parents’ equity when making financial-aid offers.

It’s a different story at hundreds of private schools and a handful of top-flight public universities across the U.S. These institutions not only ask for details about the parents’ home equity, but often expect the folks to tap some of it to help pay college bills.

The admissions or financial-aid offices at the colleges your son is considering attending can tell you whether the equity in your home will be included as part of their financial-aid offer.

If the school will indeed consider your equity when doling out financial help, make sure to ask about any exceptions or exemptions that can help to obtain the best aid package possible. For example, some schools will overlook a large amount of built-up equity if one or more of the student’s parents suffers a long-term disability, is retired or has lost a job and can’t find a new one.

It might even be a wise idea to tap your home equity and use the proceeds to make large contributions to a tax-advantaged retirement account before you fill out the financial-aid applications for your son. Though many schools now expect parents to use part of their home equity to pay for tuition, most of them don’t expect you to raid your own retirement nest egg to meet the rising cost of going to college.

One of my favorite Internet sites for information about financial aid for college is www.finaid.com, a free site that answers dozens of typical questions concerning different types of help and provides several online calculators to estimate costs and a family’s expected contributions to their offspring’s higher education.

Q:We purchased a home two years ago and financed it through a bank that I won’t name, but let’s just say it was a “country wide” lender. Now it has been purchased by a different lender that has banks, um, all across America. Can the new bank alter the interest rate on the fixed-rate mortgage that our first lender gave us?

A:Gee, your carefully worded question leaves me wondering which two banks that you’re writing about. Not!

Nonetheless, the financial institution that recently purchased the lender who issued your original mortgage two years ago cannot change the terms of your current home loan, provided that you are up-to-date on your payments. Federal law permits the new bank to change the mailing address of your future payments, but it would be illegal for it to alter the interest rate on your mortgage or make any other substantial changes to its terms.

Q:I want to purchase a house, but I don’t have a lot of money saved for a down payment. Is it true that some lenders will let buyers put their down payment on a credit card?

A:A few lenders will accept a credit card for a down payment, but it’s usually a bad proposition for the buyer.

For starters, such lenders charge huge upfront fees for a cash advance — whether it’s $2,000, $20,000 or more. Then, on top of the giant fees that you would pay for such down payment “help,” you would likely get stuck with a mortgage that’s two, three or even four times the current rate of about 5.5 percent.

And even if you could afford payments on a 15 percent or 20 percent loan, home values today are rising at roughly a 2 percent rate and (in many areas) continue to fall. Any way you look at it, it’s a lousy investment decision.

Your best option now would be to delay your current home-buying plans and instead save some money so you can make a cash down payment rather than finance it. It might take a few years to raise the dough, but it would be a better choice than putting your down payment on a high-rate credit card at a time when home values are basically stagnant and are not expected to surge anytime soon.