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125 Home Equity: Borrow Against All Your Equity
Staff - Mortgage Lenders Plus.com
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One of the more radical loans that have been developed during the home equity loan feeding frenzy over the last several years has been the 125 home equity loan. This loan is a second mortgage that provides cash in the amount of up to 125% of your home’s assessed valuation. If we are to strictly observe the terminology in the home loan business, it isn’t a home equity loan exactly; rather a loan against home equity that is yet to come. A 125% home equity loan will allow you to borrow against all of the equity that you have developed in your home, either through appreciation or debt retirement through your mortgage payments. The loan can be increased so that it creates total indebtedness, along with your primary mortgage, that totals 125% of your home’s value. If you have any equity at all in your home, that’s going to yield a substantial sum of cash – along with a substantial amount of risk. 125% home equity loans generally have much higher interest rates than standard home equity loans, as you might expect – since a substantial portion of the loan is not collateralized. Standard fixed rate home equity loans are at about 8% today (early February 2007) for homeowners with good credit. 125% home equity loans are probably going to have interest rates in the double digits – upwards of ten percent and many of them adjusting to rates well beyond that. The other obvious financial issue with these loans is that any interest you pay on borrowed money beyond the value of your home is not tax deductible. The IRS has made it clear that home loans can only be utilized as a tax deduction up to a loan amount that equals the value of the home. If you are accustomed to incorporating the allowed tax deduction into evaluating mortgage and home equity loan costs, you’ll quickly see that a 125% home equity loan is enormously expensive when compared to the standard forms of home equity loans and lines of credit. Finally, a loan of this type puts the borrower in an “upside down” position with regard the debt on his home. That means he owes more than the home is worth. An upside down position makes it impossible to either refinance or sell the home. As long as you can meet the dual mortgage payments you can keep the house, but you it will take you additional years to just get back to owing what the home is worth. A 125% home equity loan is a dangerous proposition.
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