Are 125% Home Equity Loans Right For You?

When it comes to borrowing money against your house, it can be a stressful consideration to make. Since you are borrowing against the equity of your home a default on that loan could mean losing your home. For this reason, you need to make sure you borrow wisely and do not borrow so much that you cannot afford to make the monthly payments on the loan. Which is true of many types of loans, such as mortgage bridge loans and online payday loans. Home equity loans come in varying percentages extending from less than (like 95 mortgages) up to 100 percent. There are also 125 home equity loans, in which 125 indicates the percentage you are borrowing against the equity of your home.

In such loans that are over 100 percent, the borrower can borrow up to 25% more than the home’s current market value. Some people do this to pay down high interest credit card debt, make improvements and repairs to the home, or to purchase large appliances.

Getting a 125 home equity loan comes with higher risks (like 40 year mortgages which are a different type of instrument, but have their risks too) than lower percentage home equity loans. As the percentage you are borrowing against increases, the interest rates increases on the loan. As a result, after borrowing against 125% of your home, your monthly payment could become quite large. Plus, you cannot deduct more than 100% of your home’s value from your taxes. So that extra 25% on your home equity loan is not a deduction you can take on your yearly taxes.

Perhaps the riskiest part of getting a 125 LTV home equity loan that is a greater value than your home’s worth – is if you plan to sell the home. Because you have borrowed more than what your home is worth, you need to sell your home at 25% more than its market value with a 125 percent home equity loan.  Yikes.

Because you risk the chance of losing your home if you default on a 125 home equity line of credit or loan, you should only take out one of these loans if you know for sure that you can afford the monthly payment or it is an absolute necessity. A necessity would be a dire financial situation that demanded large amounts of money for an emergency.

Another great reason to take out 125 LTV home equity loans is to improve the value of the house. If the house is in need of repairs, make sure each repair you do increases the value of the house by at least a little bit. Doing so makes the risk of borrowing more than the home’s value more worthwhile to the borrower.