A 125% home equity loan is sometimes also called a second mortgage, since most borrowers take it on the top of the first mortgage. It is a loan in which the borrower pledges his home as collateral for a part of the loan, and his income assures the repayment of the rest. The lender will have a lien upon your home. As in the case of any mortgage, you'll have to pay this lien before you can sell the property.
If applied responsibly, it can be an excellent tool to overcome a financial narrow path. You can consolidate different forms of debt into only one. This implies only one bill at the end of the month. Even if this bill is bigger, it is easier to have your peace of mind. It is also easier to renegotiate the contract of your debt.
This kind of loan is also often used by first time buyers who want to renovate a property before they move in. Renovating a home can be necessary and it will increase the worth of the home. Therefore it guarantees the lender that its loan is well secured against default.
However, many lenders see 125% home equity loans as a higher risk and don't offer this sort of financial instrument at all. Lenders that do offer 125% home equity loans will charge a higher interest rate on the loan, compared to the prime rate of a first mortgage. Even in this case; this loan is cheaper than the interest rate of consumer loans like credit cards and credit lines.
If you apply for a 125% home equity loan watch carefully the small print. The terms of some loans are simply outrageous. This is done by some lenders, so that the loan will go into default and the real estate property into foreclosure. Even if you are desperate for cash, don't jump into the first deal that you can close. Only choose an established mortgage company that you can trust. Even if not every lender offers 125% home equity loans, there are still many that do. These lenders are competing for new clients and are in a position of offering you descent conditions.
Also ask yourself if you really need 125% of your home value. There are not many situations when this is needed. The example above, about the necessity of renovating, is a good one.
Additionally in case of necessity, to pay a medical bill for example or student loan that cannot wait, putting a lien of 125% upon your home can be advisable. However, all care should be taken, if you are putting such a high burden on your home because you want to go on vacation or buy a car. Only use your home equity as needed, since it is your home.
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