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Home is where the heart is. It’s also a source of potential borrowing power.

Perhaps you wish to renovate your home. Maybe one of your children is leaving for college. Possibly you’ve racked up a great deal of debt. Or maybe there’s just too much month left at the end of your paycheck.

Whatever your reason, a home equity loan may be the ideal solution.

Home equity is defined as the difference between your home’s appraised value and how much you still owe on your mortgage. Let’s say your home’s appraised value is $200,000, but you still owe $150,000. Your home equity would be $50,000. This equity can be used as collateral for an additional loan on your property. The amount you can borrow is usually capped at 85 percent of the equity in your home.

At Kerndt Brothers Bank, we’ll answer your questions about these loans and work to give you financial peace of mind. After all, we’ve been helping Iowans just like you since 1856.

We offer two types of home equity loans: a standard loan and a home equity line of credit, or HELOC.

A standard home equity loan is for a specific, or lump sum, of money. As the borrower, you agree to pay back the loan on a monthly basis during a set amount of time, just like a mortgage loan. If you are unable to repay the loan, however, the lender can foreclose on your home. So ask lots of questions and understand the risks before you decide to use your home as collateral for any reason.

There are several advantages with a standard home equity loan: (1) the fixed interest rate is often much lower than those for unsecured loans and (2) you may be eligible for tax deductions on the interest you pay. Check with your accountant or CPA to verify these tax breaks.

A HELOC offers you a revolving line of credit, much like a credit card. Rather than receiving a lump sum, you can draw down funds when and if you need them. This loan gives you the freedom to write a check or use a credit card connected to the account. However, most HELOC loans have variable interest rates. So be sure you understand and weigh the financial advantages of taking out a HELOC. Like a regular home equity loan, you risk the loss of your house if you cannot repay this loan.

As you consider either of these loans, remember housing markets fluctuate. While it may be a seller’s market now, realize the value of your home could drop. If that happens, you may discover you’ve borrowed against a much less valuable asset.

Home equity loans make sense in many different situations, especially if your home has risen in value so you have a larger cushion. But realize you are trading unsecured debt for a debt directly tied to your home. Given that risk, it’s logical to use your home equity or HELOC funds for projects and debts that have a clear return and advantage: paying down high interest debt, starting a new business, using the money for home improvements that will boost resale value, or borrowing against your home to pay for higher education. These types of loans, however, do not make sense for funding risky investments such as speculating on the stock market.

As you consider a home equity loan, crunch the numbers and ask questions. At Kerndt Brothers Bank, we want this loan to be a solution, not another source of stress or worry for you. We’ll discuss your short- and long-term money plans and map the best strategies for your financial success. Call us today to see how we can help.

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The material provided on this website is for informational use only and is not intended for financial or investment advice. Kerndt Brothers Bank and/or its partners assume no liability for any loss or damage resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management.