EchoBay Expert: I need cash immediately and I'm thinking of applying for a 125% home equity mortgage. Are there any dangers of doing this?
Loyal Reader: There are definite dangers in obtaining a 125% home equity mortgage. When a loan is over 100% LTV (loan to value), it means you owe more on your home than it is worth. There are many issues to consider when you are looking at this type of loan.
1.What will you do if you decide to sell or if you have to sell?
In all likelihood, you will be left owing money on a home you no longer live in. Refinancing this debt can be difficult as well because it is no longer secured by real estate.
2.What will you do if the value of your home decreases?
In most cases, real estate is an appreciating asset but there have been situations where the bottom has fell out of the real estate market. If this happens to you and you took out a 125% home equity mortgage before values nose-dived, you will find yourself in a downward spiral.
3.Did you know the interest will not be tax deductible?
Many homeowners mistakenly believe that all interest paid on their home is tax deductible. Interest typically can be deducted but only on loans that do not exceed the value of your home.
4.Have you considered the difference in interest rates?
When you finance more on your home than it is worth, there is more risk involved for the lender. More risk for the lender equals a higher interest rate for you. This higher rate results in even more paid out of pocket every month.
Generally, a 125% home equity mortgage is not a good idea. If you do decide to take out this type of loan, be sure it is for an excellent reason and you have a back-up plan in place. Your home and your credit are at stake.