Should You Use Home Equity to Pay for Education Expenses? 

Key takeaways 

• Using funds from your home’s equity can cover primary, secondary and post-secondary educational expenses. 
• Homeowners have several ways to tap into their home equity, each with its own pros and cons. 

Figuring out how to pay for education expenses – whether for primary, secondary or post-secondary school – can be a challenge. According to the College Board, the average cost of tuition and fees for full-time students at a public four-year in-state school was $11,260 during the 2023-2024 school year. For a private nonprofit institution, the cost reached $41,540. What’s more, the average annual tuition at private K-12 schools was $12,350, according to the Education Data Institute.  

For college, many people turn to student loans, with 41% of U.S families borrowing, according to Sallie Mae. But borrowing comes with its own challenges. Loans can sport high, and/or variable, interest rates, and the loan landscape can be complicated to navigate. Plus, student loans never go away. They must be paid, and payments can stretch on for many years. 

Tapping the money in your home 

There is another alternative: home equity. The Education Data Initiative reports that 4% of people with educated-related debt have used home equity-based loans to fund their own college education, and that 9% of those who borrowed to fund a child or grandchild’s education looked to a home equity-based loan. 

Using home equity to fund an education can be a smart option for many homeowners. Consider that home prices have increased 54% since 2019, and that more than 90% of the country’s metro areas experienced increases in home prices in the first quarter of this year. Since equity is directly related to home prices and values, this means homeowners’ equity is still increasing.  

Ways to access your home equity 

Homeowners who have built up equity in their homes and are considering accessing it for educational expenses have several options. Three are loan-based, and one – the home equity agreement (HEA) – is not. 

Home Equity Loan (HEL) 

Home equity loans provide homeowners with a set amount of money and an interest rate that is fixed for the entire term of the loan. 

Because it is a loan, you must qualify for an HEL based on your credit and your home’s loan-to-value (LTV) ratio. That is the amount of the loan divided by the value of your home. Requirements vary by lender, but in general, you’ll need a credit score of at least 620. Many lenders require at least 680, and higher scores will net lower interest rates. Typically, lenders require an LTV of about 85% or lower.  

Home Equity Line of Credit (HELOC) 

Home equity lines of credit are just that: lines of credit. That means you can draw up to the amount extended to you as you need it. While some lenders are now offering fixed-rate HELOCs, most are variable-rate, meaning that the rate – and therefore the monthly payment – can vary over the life of the loan. Qualification requirements are usually the same as with home equity loans.  

Reverse Mortgage 

Reverse mortgages, available to homeowners over age 62, can be complex and carry significant risks. In a reverse mortgage, the lender pays the homeowner a monthly amount in exchange for an increasing share of their home’s equity. The reverse mortgage ends when the home is sold or when the homeowner passes away. The homeowner can also lose the home if they fall behind on property taxes or insurance payments, let the home fall into disrepair or move out for any reason. 

Closing costs for reverse mortgages can be higher than those of traditional mortgages. Homeowners also face origination fees, loan servicing fees, monthly mortgage insurance premiums and an upfront mortgage insurance premium. Qualification requirements include completion of a federally approved counseling session (for a nominal fee).   

Home Equity Agreement 

A home equity agreement, also known as a home equity sharing agreement or home equity investment agreement, is a no-loan way to obtain cash for education expenses – without adding debt. Homeowners receive cash up front in exchange for a portion of the future value of their home. They can buy back their equity at any time during the agreement term, often 10 years, which is often when they sell the home. With Unlock’s HEA, homeowners can also buy back their equity in partial payments throughout the term of the agreement. 

Because an HEA is not a loan, there are no monthly payments and no interest rates to worry about. The qualification threshold is lower than with a home equity loan or a HELOC. In fact, credit scores as low as the 500s may qualify, and income requirements are flexible.  

Making the decision to use home equity for educational expenses 

As with any financial decision, it’s important to look at the pros and cons of tapping into your home equity before moving forward. 

Pros 

• A debt-free start for your graduate. If a parent taps into their home equity to pay for college, their child may be able to start life after graduation without the burden of student loan debt. That is one of the greatest gifts and advantages a young adult can have. 

• Amount available. Depending on the equity you hold in your home, you may be able to access a larger amount than student loans could provide. 

• Less expensive than student loans. If opting for a loan-based option (HEL, HELOC, reverse mortgage) to access your home equity, you may find that the interest rate is lower than some student loans.  

Cons 

• Burden of financial responsibility. Regardless of the option you choose to access your home equity, the homeowner bears the responsibly, because they own the home providing the equity. In contrast, student loans can be taken out in either a parent’s or a student’s name. 

• Qualification. If you are considering a loan-based option, you’ll face qualification requirements on your credit score, LTV ratio and, often, debt-to-income ratio (how much of your monthly income goes to debt payments). Many people either will not qualify, or only qualify at high interest rates. 

• Potential additional debt. If you choose an HEL or a HELOC to access your equity, it will come with an additional monthly debt payment. Many homeowners do not want or cannot take on more debt, and another payment each month. Parents and grandparents who are eyeing retirement must also be sure they can handle the debt while maintaining the funds – and savings – to cover their needs. 

• Risk of losing your home. If you choose an HEL or HELOC, you are using your home as collateral. That means you have the potential of putting your home at risk of foreclosure should you miss payments for any reason. 

Conclusion 

Pulling cash from your home is one way to cover education costs. Consider the benefits and disadvantages of each option to determine which one best fits your needs. If you’re ready to learn more about how a no-debt, no-loan home equity agreement can help, Unlock can help. See how much cash you could get today.