125% Home Equity Loan

A 125% home equity loan is neither secured, nor cheap, nor completely deductible. The IRS allows deductions on home loans only on debt that equals the value of the home. In the case of a 125% home equity loan, the interest paid on that last 25% is not tax deductible.

Because a substantial portion of the loan is not secured, the interest rate is going to be higher than a secured home equity loan. The average interest rate for a secured home equity loan is about 7.75% in May of 2007. One highly advertised offering for a 125% home equity loan from a national mortgage company is a 25 year loan at 12.75% in interest with a 13.365% APR. That APR reveals that the fees involved in obtaining this loan are substantial.

Many people who opt for a 125% home equity loan do so because they are in serious financial difficulty. They may use the funds to pay off credit cards with an interest rate of 18%; that may look like a net savings. But it is important to keep in mind that you will be paying almost 13% interest on the borrowed money for a long time. 125% home equity loans may also come with a requirement for mortgage insurance, which will be an added monthly expense.

The other issue that many financial experts point to regarding these loans is the fact that they strip the homeowner of any mobility. In order to sell the home and move, he/she would be obligated to sell the house for its appraised value (in a slumping housing market) and make up the remaining debt on the home in cash. Few people who go into loans like this have the cash in the bank to close out a deal like this. A 125% home equity loan is, to most prudent observers, an expensive option that serves as a last resort.