125% Home Equity Loans - Danger of Borrowing More Than Home's Equity

125% Home Equity Loans - Danger of Borrowing More Than Home's Equity
By Carrie Reeder

Because of home equity loans, homeowners are able to acquire extra money for a wide variety of purposes. Moreover, these loans make it possible to tap into the equity built without selling your home. There are many home equity options. Aside from getting a loan, homeowners may opt for an equity line of credit. Additionally, there is the 125% home equity loan option.

What is Equity?

The concept surrounding 125% or no-equity home loans is very simple. Ordinarily, homeowners would acquire equity loans that equal the amount of equity built in the home. Before going any further, it is important to understand how a home's equity is determined.

Two factors contribute to a home's equity, rising home values and amount owed to the mortgage company. If a homeowner's property is valued at $200,000, and they owe the mortgage company $120,000, the home's equity totals $80,000. In this scenario, the homeowner may obtain a home equity loan up to $80,000

How 125% Home Equity Loans Differ

If applying for a traditional home equity loan, homeowners may obtain a dollar amount not to exceed the home's equity. This money can be used for home improvements, starting and operating a business, retirement, debt consolidation, etc.

On the other hand, if a homeowner is approved for a 125% equity loan, they are able to borrow more than their home's equity. Because a portion of the loan is unsecured, many lenders steer clear of these sorts of loans. However, if your credit rating is high, several mortgage lenders are ready to offer a no-equity loan.

Reasons to Beware a 125% Home Equity Loan

125% home equity loans are more fitting for homeowners who require a large sum of money. Typically, these loans are common among those attempting to start a business. Moreover, these loans are beneficial for homeowners embarking on major home improvement projects.

If home prices continue to rise, 125% home equity loans will pose little threat. On the other hand, if the housing market takes a sudden nosedive, those who accept 125% home equity loans will likely owe more than their homes are worth.

Shady lenders will offer 125% equity loans because it's a win-win situation for them. If a homeowner defaults on the mortgage, the lender forecloses on the property. However, because the amount owed exceeded the home's value, homeowners are obligated to pay mortgage lenders the difference.

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125% Home Equity Loans - Danger of Borrowing More Than Home's Equity

What is a 125 Home Equity Loan?

What is a 125 Home Equity Loan?
By Lynda Nelms

125% Home equity loans are second mortgages that literally think "outside of the box," because they allow homeowners to go beyond their homes' equity to finance things that typically require a significant amount of equity. The 125% home equity loan is a 2nd loan that is secured by your home and personal credit.

The 125% loan subordinates to the first mortgage, just like regular second mortgages do, but since the balance of the new loan exceeds the value of your home, your credit becomes an essential element for loan approval. Any mortgage added that subordinates to your existing mortgage, and also exceeds the value of your property is considered to be a 125% home equity loan.

125 Home equity loans are 2nd mortgages that are secondary to 1st mortgages, but they don't have to reach 125% of the home's value to be considered a 125% loan. Any loan that has a combined loan to value between 101-125% is qualified as a 125% second mortgage.

If the mortgage lender is required to foreclosure because you haven't made the mortgage payment for a period of months, the lien holder will receive no recourse, because there is no equity. This is the primary reason that the interest rates are so much higher with 125% equity loans.

Unique Niches of a 125% Home Equity Loan:

Primary Use of Funds: 125 home equity loans are used to consolidate high rate credit, installment loans, and home improvement projects.

125 Loans offers a single lump sum disbursement of funds at the close of escrow. You can't borrow, and re-borrow money on the same loan, like you can with home equity credit lines.

125% Home equity loans do not offer 30 year fixed rate terms
Re-payment term options (15 year, 20 year or 25 year terms)
Home equity terms are set for a close-end mortgage with a specific number of monthly payments that is charged with a fixed interest rate.

125% home equity loans do not allow interest only payment options
All 125% loans require fully amortized payments that consist of both principal and interest.

No "balloon" payment features with 125% loans
Balloon notes are not allowed when exceeding the value of the home.

The interest paid on a 125% home equity loan is tax deductible to 100% of the value. In some cases interest paid for home improvements may grant tax deduction exceptions, but consult your tax advisor.

Since the mortgage lenders' risk is more significant, these home equity loans will be offered at a higher interest rate than 1st mortgage rates. The interest rate is the issue many homeowners get flustered about when they are considering taking out a loan that exceeds their homes' value. Don't compare your 1st and 2nd mortgage interest rates.

They are apples and oranges. Your 1st mortgage won't let you pay off high rate credit card debt, while taking the loan amount beyond the homes' value.

More important than the interest rate is the amount of money you stand to save each month with a 125% home equity loan. If this loan saves you enough each month to finance a nice car, then you might want to grab the keys and start the 125 engine.

Article Source: http://EzineArticles.com/?expert=Lynda_Nelms

What is a 125 Home Equity Loan?
By Lynda Nelms