Understanding a 125 Percent Home Equity Loan

If you are trying to get a home equity loan, and are interested in getting the most you can borrow, you may be thinking of applying for a 125 percent home equity loan. These loans are typically taken out by homeowners who need a large sum of money for repairs, medical bills, or other large expenses, that require more than a normal home equity loan.

If you are considering a 125 percent home equity loan, you should be aware of the pitfalls of this seemingly good deal. There actually are many problems that you want to avoid.

Basics of the 125 Percent Home Equity Loan

In most home equity loan transactions, the lender won’t lend more than about 80 percent of the value of the home, minus what is owed on the mortgage. For instance, if you have a $100,000 mortgage and still owe $50,000 then you might qualify to borrow 80 percent of the $50,000, with a typical home equity loan.

However, if you get a 125 percent home equity loan, you can get more than your house is worth, up to the 25 percent overage. The problem with this, is that interest rates are exceedingly high and can get up to over 18 percent in some cases. This makes for very high mortgage payments. Plus, IRS rules and regulations state that anything over the 100-percent mark is ineligible for use as a tax deduction on the interest.

Having this type of loan makes it almost impossible to sell your house, unless you are able to pay off the extra, that isn’t part of the actual home’s value. No one is going to buy your house at 125 percent of its value.

Circumstances to Use it

The only time that it may be worth applying for and taking on this type of mortgage, is when you are in an extreme need of cash, such as a medical issue or some major financial peril. However, it is still a gamble, and can cause you major headaches trying to pay it back. Commonly, these are 40-year mortgages, which means that you will be paying for a very long time, with very high payments.

If you need to make major repairs to your home, it might be a reason to take out a 125 percent home equity loan, if it will then increase the value of the home, and bring it up closer to the 125 percent amount of the loan. This would mean you are taking a different type of gamble, hoping that the repairs will increase the worth of your house, so you are closer to the amount of money you borrowed. That way you might be able to sell the house at a high enough amount to recoup the loan.

Conclusion

The bottom line, is that there are many important things to consider before taking out a 125 percent home equity loan. They often have high interest of over 18 percent, any amount over 100 percent isn’t tax deductible, they have a long payback period of 40 years, and they make it hard to sell your home due to how much is owed on it.