BORROWING WITH NO EQUITY
Demystifying No-Equity Loans


With the economic environment getting more and more difficult to cope with every year, majority of Americans muster the courage to take their financial woes to rather risky schemes just to keep up. From the other side of the fence, lenders of such tricky loans are doing the happy dance, capitalizing on the peoples desperation. One of these veiled schemes is the No Equity Loan.

But before we move to the nitty-gritty, let us first answer the question: What is a No Equity Loan? A no equity loan, also referred to as the 125% second mortgage, is a program that allows qualified people to borrow as much as 125% of his or her homes value, even if he/she has no established equity in the home. The amount a person may borrow will depend on his or her credit history, the lender and the deals structure. Consumers commonly use no equity loans to consolidate bills into just one payment and help lower overall debt. What they do with the extra 25% borrowed against their home is up to them. But thats where the positive ends.

While this set up sounds attractive, especially if youre in dire need of finances, it also comes with a lot of risks. In a nutshell, a no equity loan simply means you are borrowing not just against the value of your home, but MORE than what it is actually worth. And this can be dangerous.

Some say the term no equity loan is just a euphemism for a high loan-to-value home-equity loan, or LTV loan. An LTV loan offers the same scheme and often targets people who are cash-strapped and willing to take on risks just to get the money. To begin with, a no equity loan comes with unusually high interest rates, which, according to HSH Associates, run two to six percentage points higher than the traditional home-equity loans. If thats not bad enough, the transaction fees involved in no equity loans are also much higher.

Also, if the loan amount is between 80% and 100% of the homes value, the borrower will be required to take a PMI or private mortgage insurance on the amount where an additional 0.8% is usually added to the balance. And while traditional home equity loans are tax deductible for up to $100,000 of the interest, this is not so with no equity loans. You will not qualify for any tax break under this scheme. Hence, over the long term, you will actually have to pay a lot more and will have to tread with far greater caution. One tiny mistake could send you into the pits of bankruptcy.

Therefore, before you decide that you can take on a no equity loans financial risks, try looking for alternatives first. If I were you, Id bundle a standard home-equity loan with an unsecured personal loan. Its a cheaper option to taking a no equity loan, is easier to manage and track and comes with fewer risks. Consult an expert and understand the pros and cons before you take the plunge.