Is a 125% Home Equity Loan Right for You?

Getting a home equity loan could potentially be beneficial for you in a number of different situations. One type of home equity loan called the 125% home equity loan has some different features that could help you as well. Here are the basics of a 125% home equity loan and if they are right for you.

Loan-to-Value Ratio

One of the most important factors in a home equity loan is the loan-to-value. Each lender that you work with will have their own requirements as to the loan-to-value ratio of the home equity loans that they offer. The loan-to-value ratio is the amount of money that the lender will give you as compared to the value of the home.

For example, let's say that the loan-to-value ratio of a particular lender is 80%. This means that they will loan you up to 80% of the value of the house. The lender will have your property appraised and determine the market value of it. Let's say that the value of the property is $200,000. With a loan-to-value ratio of 80%, this means that they would allow up to $160,000 to be borrowed against your house. With a home equity loan, they will then subtract your existing mortgage balance from the potential loan amount. If your primary mortgage balance was $130,000, then they would offer you a home equity loan of $30,000.

The purpose of the loan-to-value ratio is to protect the lender. They know that even if the value of the home declines and you default on the loan, they should at least be able to get 80% of the original value of the house.

125% Home Equity Loans

While a traditional loan-to-value ratio is less than the value of the house, a 125% home equity loan actually allows you to borrow 125% of the value of the home. For example, if you had a $200,000 house, they will actually allow a maximum loan amount of $250,000 to be borrowed against the house.

Advantages of 125% Home Equity Loans

  • Easy access- When you can find this type of loan, it allows you easy access to more money than the value of your home. You do not have to go out and find a secondary loan on top of your home equity loan when you still need more money. Dealing with one loan application and approval is much easier.
  • Lower interest- When you get a home equity loan, the interest rate is going to be much less than what you could get from an unsecured loan. If you need more money than what your home is worth, this could potentially save you a lot of money on interest.

Disadvantages of 125% Home Equity Loans

  • Upside down- This type of loan will automatically put you "upside down" on your home. Any time you owe more than your house is worth, this puts you in a position of greater risk.
  • Limits options- When you get this type of loan, you may not be able to sell your house and move any time soon. When you sell your house, you could still potentially have a large home equity loan balance to worry about.