What are 125% Home Equity Loans?

Do you want to understand more about 125 loans that many new homeowners use to uncover savings from consolidating high rate bills?

125% home equity loans are second mortgages that literally think "outside of the box," because they allow homeowners to go beyond their homes' equity to finance things that typically require a significant amount of equity.

Nationwide Mortgage Loans defines the 125 second mortgages as "fixed rate debt consolidation solutions that offer first time homebuyers the opportunity to get additional financing with no equity."

Many first time home-buyers utilize 125% loans for buying furniture and
debt consolidation

The 125% home equity loan is a 2nd loan that is secured by your home and personal credit. The 125% loan subordinates to the first mortgage, just like regular second mortgages do, but since the balance of the new loan exceeds the value of your home, your credit becomes an essential element for loan approval. Any mortgage added that subordinates to your existing mortgage, and also exceeds the value of your property is considered to be a 125% home equity loan.

125 home equity loans are 2nd mortgages that are secondary to 1st mortgages, but they don't have to reach 125% of the home's value to be considered a 125% loan. Any loan that has a combined loan to value between 101-125% is qualified as a 125% second mortgage.

If the mortgage lender is required to foreclosure because you haven't made the mortgage payment for a period of months, the lien holder will receive no recourse, because there is no equity. This is the primary reason that the interest rates are so much higher with 125% equity loans.
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Unique Niches of a 125% Home Equity Loan:

  • Primary Use of Funds: 125 home equity loans are used to consolidate high rate credit, installment loans, and home improvement projects.
  • 125 Loans offers a single lump sum disbursement of funds at the close of escrow. You can't borrow, and re-borrow money on the same loan, like you can with home equity credit lines.
  • 125% Home equity loans do not offer 30 year fixed rate terms Re-payment term options (15 year, 20 year or 25 year terms) Home equity terms are set for a close-end mortgage with a specific number of monthly payments that is charged with a fixed interest rate.
  • 125% home equity loans do not allow interest only payment options All 125% loans require fully amortized payments that consist of both principal and interest.
  • No "balloon" payment features with 125% loans Balloon notes are not allowed when exceeding the value of the home.

The interest paid on a 125% home equity loan is tax deductible to 100% of the value. In some cases interest paid for home improvements may grant tax deduction exceptions, but consult your tax advisor.

Since the mortgage lenders' risk is more significant, these home equity loans will be offered at a higher interest rate than 1st mortgage rates. The interest rate is the issue many homeowners get flustered about when they are considering taking out a loan that exceeds their homes' value. Don't compare your 1st and 2nd mortgage interest rates. They are apples and oranges. Your 1st mortgage won't let you pay off high rate credit card debt, while taking the loan amount beyond the homes' value. More important than the interest rate is the amount of money you stand to save each month with a 125% home equity loan. If this loan saves you enough each month to finance a nice car, then you might want to grab the keys and start the 125 engine.

Hybrid Home Equity Loans Changing the Face of Second Mortgages

According to Freddie Mac, "88% of homeowners who refinance their homes in the 1st quarter got a mortgage at least 5% larger than their first loan." Since this was the largest increase since 1990, and the Fed continues to increase key interest rates, it is my contention that the demand for cash and the ability to finance quickly is the greatest it has been since World War II.

"The reality is that some people still believe the interest rates are below 6%,"said John Allen from Laguna Beach California. John continued, "If I need cash for home improvements. Why wouldn't I just take out home equity loan since my first mortgage rate is under 5%." John's mentality mirrors many of my borrowers' frames of mind of late. Consumers are much more educated than they used to be about financing and taking out second mortgages.

 

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Customer Testimonials

"My credit card rates were getting high and I could barely afford my monthly payments but I did not want to file bankruptcy or get involved with consumer credit counseling that might hurt my credit.

"A friend referred me to Nationwide and they helped me get approved for a 125% loan that is saving us nearly $500 a month and I was able to maintain my high fico scores after consolidating the bills. Thanks again for helping us get our finances back on track."
– J. White, Palm Beach, Florida

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