Horror films like Scream 2, Sorority House Massacre, and Night of the Creeps take place on college campuses. But as frightening as these films are, nothing is quite as scary as not finding enough money to pay for college tuition. With the cost of a four-year education ranging anywhere from $26,000 to $140,000 annually, it's no wonder that parents are having nightmares. If you have equity in your home, you may be able to use a cash-out mortgage refinance to help raise necessary funding to give your child the education she deserves.

Refinance your mortgage

With a cash-out refinance, you take out a new mortgage for a higher amount than your current loan. Once you pay back your principal balance on the old loan, the difference is yours to keep. A mortgage refinance has been recently harder to come by, thanks to a depressed real estate and job market. But a struggling economy gives rise to low interest rates, which makes cash-out refinancing desirable for those who qualify.

Banks are scrutinizing applicants with a critical eye, so you must have steady income and outstanding credit to qualify. You also must have substantial equity in your home. But if you purchased before the recession started, and you're a conscientious bill payer, you may have enough equity built up to make this worthwhile. Plus, current interest rates are probably substantially lower than what you originally paid.

Following the numbers

Suppose, for example, that you bought a $200,000 home in January 2000, with a fixed-rate mortgage at 8 percent, which was the average mortgage rate that year. Your monthly payment would currently be $1,468, and your outstanding principal balance as of September 1, 2010 would be $173,322. That wouldn't leave you much room for a cash-out refinance, because the bank will generally only refinance up to 80 percent of your home's value.

But hold on. Since a home appreciates on average at the rate of 5 percent per year, your home would now be worth $325,800. That's a substantial increase from what you originally paid. However, since the economic crisis has hit home prices, let's say that the value of your current residence has dropped by 20 percent. That would give it an approximate value of $260,000, which would mean that you could refinance an amount up to $208,000 (80 percent of $260.00). With your principal balance only $173,322, you would have approximately $34,678 in cash that you could pull out of your refinance to help defray the costs of your child's education. Not only that, but with today's low rates, you could cut several hundred dollars off your monthly payment, which would mean more spending money in your pocket.

College costs keep escalating across the country. Florida's tuition is expected to increase 15 percent per year. In Washington, that number is 14 percent, and in California, it's a whopping 30 percent. A cash-out refinance can help you defray the costs of these increases by giving you more cash to play with. The extra money can help keep college tuition nightmares out of your life and where they belong -- up on the silver screen.

Published on August 17, 2010