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The 125 percent loan

Almost everyone needs a loan to help pay for a property. But wouldn’t it be nice to take out a loan for more than you need. You could probably use the extra money. Aside from the obvious advantage of this, there are also disadvantages.

In a an article published by 1st-mortgages.com, entitled, “HELOC Home Equity Loans Come Roaring Back,” author Andrew Kellerman explains why these loans have struggled in the past to gain popularity.

“A home equity loan is secured by more than your home is worth sounds like an oxymoron, doesn't it?”

Since it is secured by more than the value of your home, you should be able to increase its financial dexterity even more.

“The ‘125% home equity loan’ or sometimes referred to as the ‘125% NO EQUITY loan,’ allow the homeowner to borrow up to 25% more than his/her/their home is worth. There are lots of caveats and these change dramatically from state to state. A few are: maximum loan $125,000; no more than $50,000 cash; must use some of the loan to improve your home. Although these are 2nd mortgages they can be used as a 1st.”

The obvious benefit of this 125 percent loan is the extra money you will have. Another benefit is that the interest may be tax deductible. This does not always come true though, especially if the equity borrowed exceeds the purchase price.

“One major problem occurs when you need to or have to sell your home. Unless the value of your home has risen significantly (25% minimum) you may have to actually pay to a buyer to purchase your home. Another question to ponder before tackling one of these mortgages is what happens if you lose your home through foreclosure. The IRS calls it debt relief.”

In the past, even if you had knowledge about the negatives of the 125 percent home equity loan and wanted to apply for one. Finding one was difficult. Lenders stopped offering them because clients (borrowers) didn’t want them.

“When there is a larger than expected default rate, one of two things happen. The package buyers change their pricing or if there are major problems they drop their purchases all together.”

Wall Street portfolio managers did not try to revive these “NO EQUITY” loans because they had little success and little history.

But now there is good news for those who have read about the 125 percent home equity loans and are intrigued.

“The 125% home equity loans have been re-designed, re-priced and re-instituted. ‘Back by popular demand,’ is what actually happened. When there is such a voracious market for a product someone will take the chance. There's a lot of money to be made, Wall Street will find a way.”

Remember, there are still significant risks involved with this loan, but it is nice to know that the option to borrow an extra 25 percent is available.
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