Using your house to pay for higher education

Dear Ms. Mortgage Maven,

I am 65 years old and need about $30,000 to help my daughter pay for college. My house is worth about $500,000 and I owe about $120,000 on it. I would like a home equity line of credit but my credit score is not the best because I went through bankruptcy several years ago. I am a senior citizen and receive social security, and I also have a part-time commission-only job. My combined income is about $20,000/year.

Can I get a home equity line of credit?

-SD

Dear SD,

Two things immediately jump out at me. First, many people think that their credit score is lower than it actually is and second, you should compare getting a home equity line of credit to getting a reverse mortgage and see which one makes the most sense for you.

If you have been paying your bills on time since your bankruptcy, your credit score may be higher than you think. You should look at your credit report not just to learn your score, but to verify that it contains only accurate information. Especially since you have been through a bankruptcy, it is important to make sure that the collection accounts that were discharged through the bankruptcy are properly noted on your report.

For example, if your bankruptcy was discharged in April 2003, those collection accounts should not be reported as current collections. You want a relatively small amount of money, but you also are retired and do not make a lot of money. Do you enjoy working your part-time commission job? Do you think it could soon bring you more income for you to live comfortably for several years?

If so, then a small home equity line of credit may make sense, but remember that you will be paying your first mortgage (on $120,000) and a second mortgage (on $30,000) every month. If you answered no to both questions above though, you may want to consider a reverse mortgage.

A reverse mortgage allows you to use the equity in your home without having to make any sort of monthly payment. Unlike regular mortgages, there are no income or credit requirements, and the money you receive is not taxed by the government because it is a loan, not income. You can choose from a lump sum payment, a line of credit, a monthly payment to you for the rest of your life, or for a fixed duration, or a combination of the three.

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