Easy Money with the 125 Home Equity Loan?

A 125 home equity loan is a loan that is unlike other types of loans in the industry. With this type of loan, you can borrow up to 125% of the value of your home. Most loan programs have a loan-to-value ratio that is well below 100%. However, these loans actually let you borrow more money than your asset is worth. As such a unique lending program, there are advantages to using it. However, it may not be as good of a deal as you think. Here are the basics of the 125 home equity loan and how it works.

Why Get One

The appeal of a 125 equity loan is the ability to borrow more money than you normally would. In most cases, you are allowed to use the money however you see fit. If you need to consolidate some debt in with the mortgage payment, you are more than welcome. You can fix up the house with the money or go out and buy a boat. Many people will buy an automobile with the money and then they just have one payment to worry about for their two biggest expenses. This can give you added flexibility and a longer term for your smaller debts. It will allow you to make a smaller payment each month on things like your car loan and your consumer debt. 

The Catch

The downside to this type of loan program is that you are over-encumbering your home. When you owe 125% of the value of your house, you no longer have options to lower your monthly payments with a refinance or get a line of credit.

Also, if you decide that you want to move, you might not be able to because the value of your home will be less than the amount you owe. If you sold your house for market value, then you would only have 100% of the value of the home. The other 25% is still on the loan. You would have to come up with this amount of money before you would be released from the mortgage. This means that you could technically have a mortgage payment on a house that you no longer have.

Some programs require that you pay the entire balance once you sell the house. Therefore, you will have to come up with several thousand dollars out-of-pocket. Most people do not have many thousands of dollars sitting around in savings. If they did, they probably would not have a need for a 125% equity loan. Therefore, you may not be able to sell your house when you need to.

The likelihood that you will stay in your house for 30 years is low, most people move every 5 to 6 years. Even if they stay in the same city, they will often want to upgrade their house at some point. With a 125% home equity loan, you may not be able to do this until you come up with enough money to pay off the loan. When the market is down, the appreciation of the house will not be enough to cover it. Consider these factors before you decide to get a 125% home equity loan. 

blog comments powered by Disqus