No Equity Loan Pitfalls Revealed

No equity loan is more popularly known as high loan-to-value equity loan. This type of loan allows you to borrow an amount that is more than the total value of your home. In most cases, lenders are willing to provide clients with as much as 25% of their home equity. In essence, this type of loan is a hybrid of unsecured and secured home loans.

Although no equity loan has its merits, this type of credit facility is quite risky. Just imagine that if you were unable to repay the loan you borrowed, not only will you lose your home, but you will also have to cough up the amount you borrowed in excess of your home equity as well. This situation may lead you to bankruptcy.

So, before you sign up for a high loan-to-value equity loan, it is best that you first learn the pitfalls to avoid as enumerated below.

High Interest Rates

If there is one thing that can make you think twice before getting a no equity loan, it is the interest rate. Most of the time, lenders slap interest rates that are between 2% and 6% above ordinary home equity loans. It is not really worth all the exorbitant interest fees if the proceeds of the loan are not used for emergencies or cases that can enhance your business performance.

Lack of Tax Benefits

Interest payments of up to $100,000 incurred in relation to no equity loans are typically not tax deductible. However, if you have an equity loan, you can be assured that the money used for the payment of interest can be tax deductible.

Higher Processing and Other Fees

A no equity loan is like quicksand. Because the high fees are charged for the processing and administrative costs for your loan to be approved, getting such a loan is often not cost effective. The reason why banks and other lenders charge high fees is because they need to spend more time scrutinizing your ability to pay, your business plan, and the payment term options in order to safeguard the unsecured portion of the loan.

Necessity for Private Mortgage Insurance

If the fees and interests do not make you want to say no to no equity loan, then the additional expenses for securing private mortgage insurance could discourage from taking this loan. A high loan-to-value equity loan requires borrowers to carry insurance on the amount of the loan. And the insurance value could reach over 80% of your home equity.

Selling Your Home Will Not Satisfy Your Loan

If you think that selling your property can make your debt problems disappear, think again. In most cases, a home can only be sold for about 80% to 100% of the equity value of the house.  And unless you are able to sell your home at a price that is above your no equity loan amount, you will not be able to pay your lender in full. So if you sell your home below your equity level, you need to accept the fact that you will end up losing your house plus you will owe your lender big money.

Again, no equity loan can still be a good loan facility if there is an emergency or you are going to make use of the proceeds wisely. You just need to get familiar with its pitfalls so that you can make an informed choice if you are in dire need of cash.