There are many great benefits of the 125% home equity loan and it appears that this financing legend is making quite a comeback. The term “125%” arises when a homeowner wants to take out a second mortgage on their home and the balances of the 1st & 2nd mortgages exceed the homes’ value. Any 2nd mortgage that has a combined loan to value between 101-125% is considered a 125% loan.
Mortgage Lenders are reporting an increased volume for home equity loan transactions, and notably in states along the coast like California, Florida, Georgia, Maryland and Virginia. However the 125% second mortgage seems to be more prevalent in states that haven’t been as blessed with home appreciations recently, like Missouri, Michigan, and Indiana. As with most residential loans there are benefits and risks. Lets examine these non-conforming second loans that don’t require you to have any equity. I will detail the pros and cons of these popular second mortgages.
Pros of the 125% Home Loan:
1. Consolidate credit card debts into a second mortgage can save you thousands of dollars in interest over the life of the loan.
2. Paying off costly installment loans can significantly increase your cash flow.
3. Converting compounding interest debt into a simple interest mortgage will help reduce debts quicker.
4. Refinancing adjustable rate credit with a fixed rate mortgage reduces payments.
5. Getting cash out of your home to make home improvements can increase your homes’ property value.
Cons of the 125% Equity Loan:
1. The underwriting criteria is more difficult for 125% loans: (Higher credit scores, and full income documentation is required.)
2. Borrowing more than your home is worth can limit your ability to sell your home without coming out of pocket.
3. Trading a long-term mortgage for short-term debt like a car will cost you more interest.
4. 125% loans are secured to your property, so if you default on your payments the lender could try and foreclose.
5. The interest rate on 125% second mortgages is higher than 100% home equity loans.
Like many things in life, the 125% home equity loan option comes down to your plans for the future. If you have uncertainty on whether or not you will be living in the area for the next few years, then you may want to hold off on the 125% loan, and only borrow up to 100% of your homes value. The other option is an unsecured loan from a bank or credit card company. The unsecured loans usually have more credit requirements, and higher interest rates, but if flexibility is what you need, then that may be a good option. If you do not plan on relocating, and you have accumulated a lot of high interest debt, then the 125% home equity loan may be the answer to your prayers.
Lynda Nelms writes a popular column, called “Ask Lynda” where she offers helpful home financing tips to consumers from an experienced loan officer’s perspective. She enjoys passing her advice to her clients and consumers across the country.