125% Home Equity Loan Simplified


A 125% home equity loan is much like a 125% 2nd mortgage. It allows you to avail of a second mortgage depending on two variables: the amount you primarily paid for the first mortgage and the current value of your home. Determine the 125% current value of your home and subtract from that the cost of the initial loan and you have the maximum figure that you can take on your 125% home equity loan. Most companies have a ceiling of $100,000 on 125% home equity loans

This is a substantial amount of money that you can use on important things. Use your 125% home equity loan in paying off debts, or making the downpayment on a new house. Take out a 125% home equity loan to renovate the house to help increase its value. Do whatever you want with it, but make sure that you avail of a 125% home equity loans for something important.

Let's take a look at a hypothetical situation: say you buy a house for $120,000 and put down twenty percent of that with $24,000. Fast forward to 10 years and you've been to Nevada too much in the past years and have run up quite an amount in credit card bills. Your home is also now worth $150,000 -- 125% of that is $187,500. That is as much as you can ideally borrow for a 125% home equity loan, but keep in mind that there is usually a $100,000 ceiling and that you really don't need that much to pay your credit card debt.

But, THINK. Do you really need this new 125% home equity loan to pay off debts? Credit card companies do charge a higher interest, but have faster payment schedules that permit you to pay off the balance fast. A 125% home equity loan, on the other hand, takes 15-30 years of payment. Plus, there are origination charges that can run up to ten percent of the amount you're borrowing. That's 10% straight to the company's pockets.

Now, let's take a look at an alternative situation: you acquire a house for $120,000 and put down twenty percent of that with $24,000. Fast forward to 10 years and you feel that you need to take a financial risk that can boost your finances and set you up for retirement. Your home is also now worth $150,000, 125% of that is $187,500. You've paid off the mortgage quite well and now have the principal down to $50,000. That is as much as you can ideally borrow for a 125% home equity loan, but keep in mind that there is usually a $100,000 ceiling. So you borrow $100,000 off of your 125% home equity loan to invest in the stocks of a newly-formed internet company your broker told you had a breakthrough coming. You now owe $150,000 for a $150,000 house. Fair, right, but there are interests in play here, and although 125% home equity loans have lower interests, they can still amount to headaches. Then a tech boom comes again and your stocks skyrocket. Now that's a good 125% home equity loan.