On Marketplace Money today, a student asked whether she should get home line of credit to pay for her student loans. Because the subsidized loans would be unavailable next year and the unsubsidized loans had an interest of 6.8% which was high comparable to current interest rate in this economy, a home line of credit with 3.5% would be a very attractable option. However, the host said that historically 6.8% was not high and student loans were fixed while home line of credit had variable interest rate. This information has drawn my attention. I intend to buy a condo, pay it off and get home line of credit to pay off my student loans which has 6.8% interest but I have not thought about the variable interest rate issue.
Although student loans from government has 6.8% interest rate, it has flexible plans for student to pay and it also has deferment and forbearance for certain situations. Home line of credit is riskier and you have to make monthly payment no matter what. In my situation, if I get a home line of credit, I have to think about loan fees, closing costs, and variable interest rate in the trade-off of 3.5% interest rate. I am not sure I am willing to take this risk. In case of interest rate going up, I will be able to pay off the loans in the next three years. So if thinking about short term plan, a home line of credit is a very good option minus loan fees. I wonder how many percent the loan fees cost out of the total loan. Examples of loan fees:
– Appraisal fee for the property
– Application fee
– Closing cost, including fees for attorney, title search, mortgage preparation and filing, property and title insurance, taxes
In addition, you may be subject to certain fees during the plan period, such as annual membership or maintenance fees and a transaction fee every time you draw on the credit line. I feel the headache now :D. Will keep you updated about my plan.
The information above is from federal reserve website which is another good resource besides HUD.gov. You can find more information about finance at Federal Reserve Education: http://www.federalreserveeducation.org/ Interestingly, the website also has education games and simulations for students from Grades K to Grades 12.