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Beware Of The High LTV Home Equity Mortgage!
By EchoBay Loans Staff Writer

It sounds great. You're offered a home equity mortgage that will allow you to cash in to the equity that you've built in your home. You decide that it's the perfect way to make the home repairs you've been meaning to get to and perhaps finance a large purchase you've been planning on making. To your surprise, you find out that not only can you cash in on a portion of your home's equity, but you can actually get cash for up to 125 percent of the equity you've built in your home.

This is what is called a high LTV home equity mortgage. LTV stands for "loan to value" and the higher the LTV, the higher the amount your loan can be. For example, if you have $60,000 in equity, a 60 percent LTV home equity mortgage would enable you to borrow up to $36,000 (60 percent of $60,000), whereas a home equity mortgage offering a 125 percent LTV would allow you to borrow $75,000.
That's quite a difference!

Initially this looks like the ideal situation. This high LTV home equity mortgage seems as though it could be the answer to a lot of your financial troubles. However, if you jump right into this type of home equity mortgage before studying all of the potential pitfalls associated with it, you might be in for some seriously unpleasant surprises down the road.

The first thing to consider when deciding whether or not to go with a high LTV home equity mortgage is the question of when you plan on selling your home. If you take out this mortgage and you wind up owing more on your home than what it's worth, you're going to have to bring that cash to the closing table when you sell your home.

If you have $100,000 of equity in your home, and you take out a home equity mortgage with an LTV of 125 percent, you'll owe $25,000 more than what your home is worth. If you decide to sell your home and you've only paid of $5,000 of the $25,000, you'll have to come up with an extra $20,000 to pay off your lender at closing. Unless you know where you can get that amount of cash from, you'd better think twice about taking out this type of equity mortgage.

Another thing to consider is the interest rate. Typically the interest rate on a 60 percent LTV home equity mortgage will be substantially less than the interest rate on a 125 percent LTV loan. A higher interest rate can cost you quite a bit of money over time. It's also important to remember that interest above and beyond the value of the home is not tax deductible.

There are, however, positive aspects to this type of loan. For instance, if you don't plan on moving and intend to stay in your home until your home equity mortgage is fully paid off, a high LTV home equity loan might make sense for you, especially if you are using the funds from the loan to pay off credit cards or other high-interest loans.

A high LTV home equity mortgage can also make sense if you plan on making home improvements that will raise it's value beyond the amount that you are borrowing. For example, let's say your home is currently worth $150,000 and you owe $100,000 on the home. If you take out a home equity mortgage with an LTV of 125 percent, you could borrow $62,500. If you planned on using that money to put an addition on your home and make other home improvements that would raise the home's value to $185,000, it would make sense to take out the high LTV home equity mortgage because your home's value would exceed the amount you owed after improvements were made.

By considering how long you plan on staying in your home, how much your home is worth versus how much you will owe on it when you plan on selling, and what you will be using the funds for, one can safely determine whether or not a high LTV home equity mortgage is right for them. It's better to consider the facts carefully before taking out this type of loan than to regret it a few years later when you need to sell your home, but can't because you owe more than what you can sell it for.


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