Mortgage hurt tuition assistance?

hadleyApril 12, 2009

This may be a very ignorant question, but then, isn't that what questions are for, to answer ignorance? :)

Anyway, we currently have no mortgage on the house we are trying to sell. We plan to build and had originally planned to go ahead and build using savings while this house was on market. As 2008 went by, that did not seem like such a good or practicable plan (especially as "savings" in the stock market continued to disappear).

Well, ok, so we thought we'd wait for the house to sell. In a market where avg. DOM is over 300, that will be awhile.

In the meantime, DH is eyeing these ultra-low mortgage rates. He's wondering if it would make sense to take out a mortgage here and use the $ to build the new house now. That would leave us with prop tax on this place till it sells and we understand that it would need to sell within two years of our leaving to avoid capital gains. But we're thinking, with move out date still 6 months out even if we started building today, surely the house would sell in the next 30 months.

Anyway, if we kept the borrowed amount well below the assessed value of the home today, what are the downsides to this plan? Would we need to also keep it well below the bank's appraised value to ensure we didn't run into a snag with the bank having to approve an offer? It has been over 20 years since we first took out a mortgage, I really don't remember the process.

The big question, too: Would that mortgage money count as income in any way for either tax or college tuition assistance purposes? Any other penalties or consequences that could bite us?

Of course, we would talk with lenders and do some other 1st hand research, but we are very curious if anyone has experience with this, particularly the college question.


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Would that mortgage money count as income in any way for either tax or college tuition assistance purposes? Any other penalties or consequences that could bite us?

The answer on college tuition assistance is: it depends on whether you're applying to FAFSA schools or Profile schools (two different financial aid application forms). For FAFSA schools, the equity in your house is not reported as an asset. This is to your benefit when calculating financial need. If you refinance and pull a lot of money out of your house, it will not count as income for FAFSA. However, the money must be reported as an asset regardless of where you park it. If it's in cash, it will be "assessed" for FAFSA at a rate of 5.6%. So if you have $200K in cash (for example), then $11,200 of it will be included in your expected family contribution to college. This cash plus your other savings might put you out of the running for any need-based aid. (You also have an asset protection allowance so the assessed value will be a little lower).

For schools that require you to fill out the Profile form, your home equity will be required to be reported. How each individual school uses this number is up to its own formula, so it's impossible to say if it will decrease your aid. If you pull out equity as cash, your total assets remain the same (equity is the value of the house minus what you owe on it), and so it doesn't necessarily matter for Profile where that asset is.

Second homes are considered assets for both FAFSA and Profile and their net value reported on both forms.

Here is a link that might be useful: Good info here

    Bookmark   April 12, 2009 at 12:38PM
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I believe you have 5 years to sell your current home to avoid capital gains.

    Bookmark   April 13, 2009 at 4:45PM
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Unless the law has changed recently, you have to have lived in it for 2 of the last 5 years before you sell it. So if you move out and don't move back in, you have 3 years after you move out to sell it and avoid capital gains taxes.

    Bookmark   April 14, 2009 at 3:17PM
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