Canada's Condominium Magazine

Home equity or retirement savings for unexpected expense?

If your child got accepted into an American Ivy League university like Harvard or Yale, where tuitions and costs can be in the $60,000 per year range, would you be able to assist financially? Assuming your child did not have major help with paying, such as a scholarship or grant, and assuming you are not wealthy, what would you do?

Typically, parents have two main options when large sums of money are needed for emergency expenses like illness, or for situations that have not been adequately prepared for otherwise, like college education for the kids: they can tap into their retirement savings, or they can take equity out of their homes.

Neither of these two options may be desirable, but is one at least better than the other? Is there a lesser of the two evils?

It turns out that there is. For the relatively small number of parents in the US who have to deal with this situation—just 5 per cent, according to a survey by the country’s principal lender to students, Sallie Mae—the less bad solution is the home equity. Eating away at your retirement savings, financial planners agree, should be a non-starter.

Why? Because people are less likely to repay what they take out of their retirement savings. The result? Inadequate retirement savings when the time comes to use them.

But refinancing the home and taking out cash, or getting a home equity loan or a home equity line of credit—a HELOC—lets the parent pay the loan back gradually. It’s best, say experts, to have a plan to pay it all back within ten years. The point is, you have to pay it back. And your retirement nest egg remains intact as you do.

Another benefit, though only for US home owners, is that interest on their mortgages and on home equity loans is tax deductible.

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