With a home equity loan, a homeowner can get extra cash to use for a wide range of things. Also, these loans let you use the equity you've built up without having to sell your home. There are many ways to use home equity. A homeowner may choose an equity line of credit instead of a loan. There is also the option of a 125 percent home equity loan.
What does it mean?
The idea behind 125 percent or no-equity home loans is very easy to understand. Most of the time, homeowners would get loans equal to the amount of equity they had built up in their home. Before moving on, it's important to know how to figure out how much equity a home has.
The value of a home going up and the amount owed to the mortgage company both affect a home's equity. If a home is worth $200,000 and the homeowner still owes $120,000 on the mortgage, the home's equity is $80,000. In this case, the homeowner could get up to $80,000 in a home equity loan.
How loans with 125 percent equity are different
If a homeowner wants a traditional home equity loan, they can get up to the value of their home's equity. This money can be used to make changes to your home, start and run a business, save for retirement, pay off debt, etc.
On the other hand, a homeowner can borrow more than their home's equity if they are approved for a 125 percent equity loan. Because part of the loan isn't backed by anything, many lenders stay away from these kinds of loans. But if your credit score is good, many mortgage lenders are willing to give you a loan with no down payment.
Why a 125 percent home equity loan is a bad idea
Homeowners who need a lot of money are better off with 125 percent home equity loans. People who want to start a business often take out these kinds of loans. Also, these loans are helpful for people who want to make big changes to their homes.
If home prices keep going up, 125 percent home equity loans won't be much of a danger. On the other hand, if the housing market drops quickly, people who take out 125 percent home equity loans will likely owe more than their homes are worth.
Untrustworthy lenders will give out 125 percent equity loans because it's a win-win for them. If a homeowner doesn't pay his or her mortgage, the lender takes the house back. But since the amount owed was more than what the home was worth, homeowners have to pay mortgage lenders the difference.
