125% Home Equity Loan
Before you decide to refinance with a 125% home equity loan there are some you should consider. The main concern with these programs is that you will owe more on the home then it is actually worth. This may cause a problem if you want to move in the near future
Qualifying for a loan that is 125% of the value of your home is much harder and more strict than applying for a mortgage loan that is 100%, or under, of the value of your home. Normally, you will not be able to have any late payments over the last 12 months, and many times no late payments during the last 24 months. Your credit scores should definitely be over 700 and some lenders will require even higher credit scores for 125% financing.
This may be an excellent way to finance any improvements that need to be made in the home. The improvements in turn may increase the value of the home after they are completed.
For some consumers, financial burdens may make this an attractive choice for debt consolidation. If you aren’t planning on moving for awhile and your budget is stretched to the limit, this would be an alternative.
Talk to your loan professional today about the pros and cons of using this loan product in your situation.
Remember that if you are taking equity out of your home in amounts over $100,000 that is not related to the improvement of the home nor to purchase additional property, then you are not able to deduct the interest payments on your taxes.
Be very careful when using the 125% loan. If you don’t gain back the extra 25% through appreciation or making improvements, then you will be obligated for the extra amount if you sell your home. Can you handle the thought of owing more on your home than your home is worth? If not, then this loan probably isn’t for you.
Lenders offer 125% Home Equity Loans in markets where property values are on the rise. The loan is made with the expectation that the property will increase in value and give equity protection to the lender. Lenders become very hesitant to offer these kinds of loan programs in markets where property value are stable or declining.
These are great loans for paying off debt and to make your interest a tax write off.
If you are trying to pay down credit card debt and have high enough credit scores to qualify for a 125% home equity loan you may want to look at low interest or zero percent credit cards as another option. 125% loans come with an interest rate normally over 10%, some are even variable rate HELOCS. By using a credit card with a low interest rate or even a zero percent rate you will save significant money and pay down your debt faster.
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