Your home may be the perfect education-financing solution if you, or your parents, own a home.

Home equity is the difference between the fair market value of your home and the combined principal balances of all mortgages you may have on the home. It's the portion of the house you own and the lender doesn't.

Your home's equity is a valuable asset because you can use the equity as collateral for your loan—you can get money from your home without having to sell it.

Lenders regard a home equity loan as very secure because homeowners are not as likely to default on this type of loan as with other loan types.

The bad news is that if you do default on the home equity loan or the mortgage loan, the lender(s) could foreclose on your home. There may also be fees, or closing costs, for setting up the loan, applying for the loan, recording the loan, and performing a property survey and title search.

Repayment

The normal repayment term for a home equity loan is 5 to 15 years, depending on:

• Amount borrowed
• Needs of the borrower
• Lender

Regardless of how far along you are in repayment, the loan must be paid in full if you sell your home.

Loans Types

There are two types of home equity loans:

• Term equity loan
• Home equity line of credit

Term equity loan offers a one-time lump sum, which you pay off over the stated term. It usually has a fixed interest rate and the payments are the same each month.

A home equity line of credit offers more flexibility because it works similar to a credit card. You can charge (or borrow) up to your loan limit as you need the money during the life of the loan (a period set by the lender).

As you pay off the amount that you've charged, you recycle the repaid funds so that you could actually spend, and repay, them again. This is called "revolving credit." While this is very convenient, the line of credit does have drawbacks:

• Interest rates are usually variable.
• Monthly payments will be based on the interest rate and the amount of credit you've used.
• If the time limit expires, you must pay the loan off. The lender may allow you to extend or renew the line of credit.

The home equity line of credit is a better match if you need to borrow funds for more than one academic period (each semester over the next four years). You can borrow what you need when you need it to cover the costs. And, if you're able to repay principal between charges, the line of credit may actually cost you less than the term equity loan.

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