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125% of Your Home Equity May Be Available to You

Joy Breiling
LoanBiz Columnist

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If you have good credit, you may able to get a home equity loan, even if you have little to no equity in your home. Sound impossible? It's not. In some cases, lenders may be willing to lend you up to 125% of the value of your home using a second mortgage home equity loan or line of credit.

Home Equity Loan vs. Line of Credit

There are two major differences between a home equity loan and a home equity line of credit, regardless of whether you are borrowing 125% of your home’s value or not. A home equity loan is a fixed rate second mortgage that fully disperses the funds to you in one lump sum. A home equity line of credit has a variable interest rate and the funds are dispersed as needed during what is called your "initial draw period," generally the first 5-10 years of the home loan.

Structuring Your 125% Home Mortgage

In the majority of loan scenarios, a first mortgage lender will only finance 80% of the value of your home in a mortgage. If you are purchasing a new home and do not have a large down payment or want to access your available home equity, you would apply to a second mortgage lender for a home equity loan or line of credit.

Since the first mortgage lender assumes less risk than the second mortgage lender, the first mortgage interest rate can be significantly lower. As such, if you are considering a 125% home equity loan or line of credit, making sure your first mortgage is at 80% of the value of your home can position you for a better monthly payment structure. You would then apply to a second mortgage lender for the additional 45% of your value, giving you a 125% total loan-to-value proportion.

Benefits

Having access to the additional equity in your home can bring many benefits.  Common uses for these funds include consolidating high interest rate credit cards or auto loans into your home mortgage which can provide a lower interest rate or using the funds for home improvements in order to raise the value of your home.

Disadvantages

If you finance 125% of your home value with a second mortgage, you will end up owing more money than your home is worth. This can become a problem if you find it necessary to sell your home in the near future. Your second mortgage lender will still expect you to pay them the full amount of the funds you borrowed. If you are unable to do so, it will cause a large negative affect on your credit, which may make it difficult to purchase a new home later.

You can't get a 125% second mortgage just anywhere. Most second mortgage lenders will limit you to 100% of the value of your home. Shop around with different lenders to find one that meets your financial needs and provides favorable terms for interest rates and repayment.  


About the Author
Joy Breiling has been employed with the mortgage industry since early 1997. During her career, Joy has fulfilled many positions; including Operations Manager of a large Bay Area broker office. She is currently licensed with the California Department of Real Estate and is an active mortgage originator.

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