9. Home equity loans have many advantages. For example, the home equity loan may be the source of funds to help Jeff and Mary finish their basement. The interest on the loan will be tax deductible. The arrangement that Jeff and Mary are looking at will involve a 15 year payback period and would allow for them to draw down on any unused funds in a credit line arrangement.

Please describe two disadvantages of a home equity loan and recommend an amount that Jeff and Mary should request for their line of credit.

provided information:

Assume that a bank is willing to loan up to 80% of the value of the home (between the mortgage and the home equity loan)

They own their home which has an assessed value of $200,000 and a market value of about $300,000 (as determined by a real estate appraiser based on recent sales of comparable homes in similar neighborhoods.) The mortgage on the home has a balance of $140,000. A review of the Douglas' financial information, bank statements, and other documents shows the following as of 11/30/16:

2011 Camry worth about $11,000, with a bank loan balance of $3,000

2012 Volvo S60 worth about $15,000, with a bank loan balance of $10,000

An insurance policy on Jeff's life with a face value of $100,000 and no cash surrender value. Mary is the beneficiary listed on Jeff's policy.

An insurance policy on Mary's life with a face value of $10,000 and no cash surrender value. Jeff is the beneficiary listed on Mary's policy.

Credit card balances that total $3,500.

A savings account with a $1,000 balance.

Two mutual funds earmarked for the children's college education. The account for Paul has a balance of $10,000 and Marcy's has $11,000 as a current balance. The fund has averaged an 8% annual rate of return over its life.

100 shares of Apple Inc. (NASDAQ: stock symbol = AAPL), formerly Apple Computer, Inc. You need to value this stock based on the 11/30/16 price per share. You will need to find that on the Internet.

200 Shares of AT&T (value as of 11/30/16)

150 shares of Twitter. (value as of 11/30/16)

A checking account with a balance of $3,000.

Jeff estimates that their furniture, fixtures etc. in the home are worth about $7,000.

Jeff and Mary have retirement accounts that have a current market value of approximately $200,000.

Mary still has an education loan with an outstanding balance of $15,000. It still have seven years left on it.

A vacation loan of $750 due in 6 months and a home improvement loan of $2,000 due in 2 years (unsecured - not a home equity loan.)

Jeff wants to finish the basement and he has discussed this at length with Mary. He is getting estimates from contractors based on ideas that both he and Mary have to create a play area for the children and a TV/den for the family. Jeff and Mary love to play ping pong and pool and would love to introduce the children to both "sports." He believes that the project will cost about $30,000 and he is interested in tapping into the home equity.

Jeff is also an avid baseball fan and is looking at buying a membership to a local baseball/softball facility for both Paul and Marcy. He figures that since he doesn't have any expensive hobbies, it would be fun to get Paul started as a baseball player and Marcy as a softball player. The membership costs and related costs are as follows: $1,500 per year (covers both kids), equipment $500 per year, and team registration and travel costs will be about another $1,000 to $2,000 a year depending on how serious the kids become. Mary is not sure that this is a priority at this point and wants to explore this possibility in more detail.