Dangers of 125% Secured Loans
As a potential borrower, there are some important questions to ask yourself before you take out a 125% secured loan. You need to be aware of the dangers. Typically, a 125% secured loan actually allows you to borrow 125% of the appraised value of your home. Just exactly why would you want to take on this much debt?
One example might be a home improvement loan, whereby the value is increased by the home improvement that you are doing, so if you plan on selling your home after it is improved, you should be alright and not over-obligated.
The dangers of 125% loans are if you plan on pulling out cash for a personal need such as a vacation or a motorcycle for example, you could be headed for trouble. These types of loans actually allow you borrow more than your home is worth. How is this possible? First and foremost, you can always find some lender to lend you money. That is really what those lenders are in business to do. Once the loan is funded however, the problem becomes yours if you lose your job or the market values of real estate drop suddenly. Let’s not forget there is a huge price for 125 secured loans. They do not come cheap. As with all loans, the interest rates are set to offset risk. Because these lenders are lending you money that exceeds their collateral (your home) they offset this risk with a higher than normal (and sometimes even excessive) interest rate. They will also charge points. So you definitely need to proceed with caution when you take out one of these loans.
Another problem with 125 secured loans is that of income tax relief. You can only receive tax benefits on home equity, home improvements, first and second mortgages up to the fair market value of your home. So if you are planning on taking a write-off for the interest on a125 secured loan, you might be setting yourself up for an IRS audit. None of us want that, do we?
125 secured loans can make sense if you plan on improving your home right before selling it on. So proceed with caution, give the matter a lot of thought, and watch out for the dangers.
