Is a 125 Equity Loan a Good Idea?

The 125% Home Equity Loan is a type of loan in which the lender gives more than the home value. This type of loan can be very attractive for the extra amount of cash available, but is not without potential risks.

This loan can come at the right time if the borrower has a dire need due to some sort of financial setback or unforeseen expense. It is crucial that a payback plan is in place when the loan is made, or further setbacks can occur.

What are the Risks of a 125 Home Equity Loan?

  • The 125% LTV Home Equity Loan typically have much higher interest rates and closing costs. Those closing costs are often as much as 10% of the loan. 
  • There may be hidden fees, known as "packing" that do not show up until the final 125 LTV home equity loan contract. "Credit Insurance" or other hidden fees may be charged, so it's important to look over the fine print.
  • The homeowner may be at risk if he goes to sell the home because he has borrowed more than the house is actually worth. The home's value can also decrease at any time.

There is no tax deduction that can be taken on a 125% home equity loan if it exceeds the fair market value of the home. Payments may actually be higher or can escalate during the term. A borrower should evaluate the risks of this loan to his situation before applying.