Should You Take a 125% Mortgage?

Allison Beatty
LoanBiz Columnist


There are so many California mortgage programs out there, it can be hard to keep them all straight. 125% mortgages have become especially popular in recent years. A 125% mortgage refers to the loan-to-value ratio. In essence, this means that you can take out a home loan for as much as 25 percent more than the home's value. Here's how to decide whether this type of mortgage makes sense for you.

Understanding 125% Mortgages

These types of home loans are designed for California mortgage borrowers who want extra funds for paying down debt or other expenses. 125% mortgages are attractive because the funds can be used for any purpose, such as paying off high-interest credit cards or remodeling a kitchen.

Rates For 125% Mortgages

When shopping for a California mortgage, look carefully at the interest rate. Rates can run the gamut, some hovering around the prime rate and others several percentage points over. Depending on your credit score and history, a 125% mortgage may carry a higher rate than a traditional mortgage with an 80-20 loan-to-value ratio.

Pay Attention to Housing and Mortgage Markets

Before taking out a 125% mortgage, take a look at your local real estate market. Since you will be borrowing more than the home's current value, you want to be in an area where homes are appreciating in value. Also consider the interest rate; a home equity loan may provide a more favorable rate.

To make sure you're getting the right fit, consult a loan advisor. 125% mortgages are not right for everyone: one borrower's timely windfall is another's insurmountable debt burden.

Source
MarketWatch.com

About the Author
Allison E. Beatty is a syndicated real estate writer who has been writing home improvement columns for 15 years.