Can I pay off a ‘Parent PLUS Loan’ with a home equity loan? My lender says ‘no’

Q: I applied with my credit union for a home equity loan with a fixed rate to pay off my federal Parent Plus Loans. I was approved but advised that, due to regulations, I could only pay off such a loan using a home equity line of credit with a variable rate. I don't want to use a variable-rate loan to pay off the federal loan. Is there such a regulation? Does the federal government actually stipulate what types of loaned monies I can use to pay off their loan? Is my credit union steamrolling me? Help!

A: There is no federal regulation we are aware of that proscribes a choice of one loan product over another. It may be that your lender has a policy that they only offer fixed-rate home equity loans for things like home improvement rather than debt management.

Regulations are changing at the moment for closed-end mortgage loans. It may be that your credit union -- like many lenders -- isn't actually interested in offering fixed-rate products at the moment, and so is steering you toward the product they are making available for all purposes; HELOCs aren't subject to the same rules and are less costly and simpler to originate.

You'll need to check, but your lender may offer a "loan within a line" option, too. In these situations, you initiate a home equity line of credit, take a draw of a given size, then have the option of "breaking off" this portion into a fixed-rate, fixed-term payment plan. For some lenders, this is the only way they offer fixed-rate access to your home equity.

Of course, you are also free to shop around to see if other lenders in your market can more directly meet your needs, too.

Ask the expert
Keith Gumbinger
Keith Gumbinger
Mortgage Expert
Vice President, HSH.com
About Keith: Mortgage market observer and analyst with 35 years experience... (more)
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