125 Home Equity Loan

Let's start this article with a simple question, What is a 125 Home Equity Loan ? 

125% Home equity loans are second mortgages that literally think “outside of the box,” because they allow homeowners to go beyond their homes’ equity to finance things that typically require a significant amount of equity.

The 125 is an actual loan product being offered to the consumer today as enticement to borrow money from a particular lender.  In today's market of racing real estate prices and the extremely low interest rates offered by mortgage lenders, the 125 has become a popular product.

You may have even seen all the television ads that promote the 125 mortgage; in fact it's been one of the most highly promoted products to enter the market.  Do you understand exactly how the 125 works, however.  Many consumers truly do not understand the implication of a 125 mortgage and their five year future.  125 mortgages work in this way:

Your potential home is worth $100,000, and you're allowed to borrow $125,000.  The seller is only asking $85,000 for the hundred thousand dollar home, this means you’re able to borrow $40,000 above the asking price for the home.  That leaves an awful lot of money on the table, and you may do what ever you choose with the $40,000.  This is an awfully tempting situation for many young consumers.

What might they choose to do with $40,000 ?  Some may buy cars, some may take vacations, and some may simply spend $40,000.  Is this the wise choice ?  The choice for the mortgage lender: absolutely, for the consumer probably not.  Although the interest is completely tax-deductible, and the payment may be affordable, it does not allow the consumer to build equity in their home.  It promotes excessive spending habits without regard to the consequence of a mortgage, that is more than a home is actually worth.

What happens to the consumer if they fall behind in their payments ?  What happens if they lose their job ?  Do they have any established equity upon which to draw ?  No they don't.  Nor will they be able to sell their home in order to cover the mortgage loan that exists on their home.  You see not everyone operates under the best case scenario.  Sometimes tragedy strikes, sometimes there are just circumstances beyond our control; when this happens if you have no equity, if you have no savings you have no home, but you still have a mortgage.

The 125 mortgage is a great advertising tool, it's a great way to sell mortgages; but it's not often a great buy for the consumer.  Unless, you take the remaining funds, the $40,000, and make improvements upon the home, and reinvest the money in the home.  Now the home’s value has increased, is now worth $150,000 and you have only a $125,000 mortgage.  From the consumer standpoint, this is a great benefit and it was only possible by way of the 125 mortgage. 

For the mortgage lender it should be through this type of advertising, that we encourage consumers to take advantage of a 125 mortgage; but this is not often the case, because many times we appeal to consumers, based on all the opportunity to spend the money a luxury items.  Items we could not under normal circumstances afford: a new car, a vacation to the Bahamas, or any off a number of items that should be purchased only, as a luxury.

It is important to understand, that the mortgage lenders' risk is more significant, and therefore these home equity loans will be offered at a higher interest rate than 1st mortgage rates. The interest rate is the issue many homeowners get flustered about when they are considering taking out a loan that exceeds their homes' value. Don't compare your 1st and 2nd mortgage interest rates. They are apples and oranges. Your 1st mortgage won't let you pay off high rate credit card debt, while taking the loan amount beyond the homes' value. More important than the interest rate is the amount of money you stand to save each month with a 125% home equity loan. If this loan saves you enough each month to finance a nice car, then you might want to grab the keys and start the 125 engine.

Today's real estate market, and real estate mortgage products are more numerous than ever before.  We have more choices, we have more opportunity, than at any other time in recorded real estate history; but we must be careful to avoid abusing those choices and opportunities.  The mortgage lenders, the traditional lending institutions, and the consumer do not often operate with those consequences in mind.  Adequate legislation and adequate education will only go so far; the reminding responsibility is a moral obligation that cannot be legislated.  It can only be encouraged.  So let us take a moment to encourage you, the consumer to make sure you fully understand the applications of your choices, and the 125 loan.