No Equity Loan, 125 Second Mortgage, 125 Mortgage

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Understanding No Equity Loans - - And Their Risks

Second mortgage loans have been a means by which hundreds of thousands of homeowners have been able to use their home values to save money. By taking out a second mortgage loan or a debt consolidation loan, a borrower is able to combine the balances of current bills and debts into one loan... and one payment. Borrowers with good to excellent credit may be able to borrow up to 125% of the value of their current property.

Bills Balance Payments Debt Consolidation Loan
Credit Card #1 $5850 $135.00 -0-
Credit Card #2 $5,300 $157.50 -0-
Credit Card #3 $5,060 $249.00 -0-
Credit Card #4 $5,200 $262.50 -0-
Credit Card #5 $2,600 $87.00 -0-
Credit Union $1,790 $83.00 -0-
Car Payment $10,090 $262.50 -0-
TOTAL $35,890 $1,236.50 $481.20

In this scenario, based on a $43,000 loan over 25 years at 13% APR (which can easily be beaten with today's rates), the borrower saves $755.30 per month. 

As lenders will tell you, the money from a second mortgage loan may be used for any purpose- including but not limited to paying off high interest credit cards, home improvements, tuition, vacations, luxury items, and anything else. For some, this may be a nice way to finance items that they would otherwise finance through other loans with higher interest rates. 

But Consider The Risks

If you don't have liquid assets, then perhas another loan type would be more appropriate. This means, if you don't have some means of accessing cash to get yourself out of a pinch, you may do better with another kind of mortgage, because that pinch can come from the loan itself. Consider the following scenarios:

  1. Your circumstances change and you need to move to another state for a job, or to take care of an elderly parent. You need to sell your home, but you have no equity in your house, or  you actually owe more on the loan than the current market value of your home (which is called negative equity). In this case, to be able to sell your home, you will need to come up with enough cash to cover realtor fees and to cover the difference between the selling price and what you owe. Consider this possibility before you get a no equity loan.
  2. If you start off with no equity or negative equity and the value of homes in your neighborhood begin to fall, your negative equity will grow, making the potential problem grow worse.
  3. If you experience an unexpected drop in income, or end up taking on a significant additional financial responsibility such that you can no longer afford your monthly payments, selling your house will still carry the difficulties mentioned above.

There was a time, not too long ago, when some lenders were pushing No Equity Loans pretty hard, even lending up to 25% more than the value of the home (called a 125% Loan). But lenders are more hesitant to enter into these loans than they used to be, because the risk of default on these loans has shown itself to be unacceptably high. However, with stricter guidelines in place, no equity loans may still be available to some borrowers. In the right circumstances, they can be a nice option. Just be sure to undertand and plan around the risks beforehand. For some borrowers, a no equity loan opens up possibilities that may not otherwise exist.

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