125% of Your Home Equity May Be Available to You
Joy BreilingLoanBiz Columnist
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.
