Many parents of college age children would like to utilize the equity in their home to help pay for college expenses. When considering this course of action, there are two issues: (1) Should the first trust deed be refinanced, or should a second trust deed line of credit be secured? and (2) Will the interest be deductible?
The decision whether to refinance the first trust deed or to obtain a second trust deed will depend on several factors, including how favorable the interest rate is on your current mortgage, how much it will cost to refinance, how much you need to borrow and how long you will remain in the home. Generally, if your interest rate is near the prevailing rate for new mortgages, it will be better to obtain a second loan or a line of credit. The line of credit has the added advantage that you can draw on it as needed, rather than trying to estimate your needs in advance and borrowing a lump sum. If you are planning to sell your home within the near future, the cost of refinancing the first mortgage is probably not warranted. On the other hand, if your current mortgage is more than 2 points higher than the prevailing mortgage rates and you plan to remain in the current home for the foreseeable future, it is probably better to refinance the first mortgage anyway.
The tax laws associated with deducting home mortgage interest can be tricky if you have previously refinanced or have mortgages in excess of one million dollars. However, if your current mortgage is less than $1 million and you have never previously taken any equity out of the home, you can borrow up to an additional $100,000 and still deduct all of the interest as home mortgage interest.
CAUTION: The limitations associated with the deduction for home mortgage interest are complex and tax strategies involving home mortgages often require the services of a professional advisor. Please call this office for assistance.