Many people think that the 125 is the best loan for them. But you should think carefully about this product.
The name "125 loan" comes from the fact that you can usually borrow 125 percent of the value of your home. It's a mixed loan type because some of it is backed by your home and some of it isn't. Your interest rate is higher than with a fully secured home equity loan because a part of the loan is not secured.
Many people get 125 loans because they only have to pay one lender instead of several. Due to different interest rates, the single payment is often less than the sum of all the payments it replaces. Most of the time, the rates are much better than credit card rates, but if you add other loans, like student loans, the rates on some of your debt may go up.
For example, you might still owe $11,000 on a car loan. Your interest rate is 8.5%, and you have 4 years left to pay. You add the note to your 125 loan, which has an 11.5 percent interest rate. Your interest rate has actually gone up.
If you roll over a credit card with a $12,000 balance and a 19% interest rate, you lower your interest rate. But you will have to make payments for at least ten years.
The real risk is when people take out a 125, roll over their credit card debt, and then use those cards to the max again. The term for this is "reloading." You now owe twice as much as before. You are in a worse spot now and could lose your home.
When you get a 125, you have to be committed enough to cut up each credit card right then and there. This will make it easier to resist temptation.
You might be thinking, "Wait, I can take the interest on a 125 off my taxes." Yes, for every dollar you spend, you save 28 cents. Doesn't make a lot of sense. Also, you can't deduct from your taxes the amount of interest on the loan that is more than the value of your home. If you deduct it, you'll pay more taxes because of it.
You are also no longer making money on your home. Your home is worth less than what you owe on it. You can't sell it until the value goes up or you pay off enough of the loan so that the balance is less than the value of the house. Most of the time, that takes between five and ten years.
If you have to sell your home quickly, you will probably have to pay money to get rid of it. You're spending money to sell your home. If you plan to live in your house for a long time, you might not have to worry as much about this.
But remember that strange things can happen. When you take on a lot of debt, you put your future in jeopardy. Getting a 125 loan to pay off the debt might not be the best choice. As you may have been told, it's not the easy way out. It's the same debt, but in a different place. This time, it's your house on the line, so be very careful.
