Understanding 125 Home Equity Loans

Karen Lawson
LoanBiz Columnist

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A 125 mortgage loan is a home equity loan that when combined with an existing mortgage loan(s) can equal up to 125% of your home's value. Homeowners with solid credit who need cash may find that a 125 home equity loan can be the most affordable way to get it. The key to 125 home loans is that they are not meant for first time buyers or those with compromised credit because although a lien is recorded against the property, there isn't sufficient home equity to truly secure the loan.

125 home loans and home worth
"125" refers to 125% loan-to-value (LTV), and indicates that a 125 mortgage involves borrowing up to 25% more than the home is worth. A home worth $200, 000, with a first mortgage balance is $180,000, would support a 125 home equity loan amount of up to $70,000. The total amount of both mortgage loans would be $250,000, or 125% of the home's value of $200,000. Those who want a mortgage that exceeds their home's value must have reasonable expectations that their home will increase in value, that they will remain in their home long enough to recoup the lost equity, and that they can repay the mortgage under any circumstances.

Who should consider 125 home loans?  
People with steady long term employment, and/or those who have high credit scores (near the 700 mark) can generally qualify for a 125 home equity loan. Due to the risks involved, the reasons for using such financing are limited. Using 125 mortgage financing for major home improvements or renovation can potentially increase the value of the home, but the unpredictability of real estate markets means there is no guarantee of increased value. This should be carefully considered before increasing the mortgage liability and negating home equity. Paying off a catastrophic one-time expense such as uninsured medical expenses may be another valid reason for choosing a 125 mortgage. Tax benefits can vary, so homeowners should consult a tax advisor before increasing mortgage debt.

What about debt consolidation?
Due to the heightened risk associated with 125 home equity loans, they may carry interest rates significantly higher than mortgages at lower LTVs. Borrowers should determine that they will be paying less interest and be certain that they won't default, which could cause the loss of their home. In many situations, consumer credit counselors may be able to assist with reducing credit card debt through their repayment programs. They can work with creditors to reduce interest rates and other fees. Assuming additional mortgage debt for consolidating consumer debt may be appropriate, but homeowners should consult financial professionals to make the best decision.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno

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