125 Home Loans - 125 Home Loans

In choosing home equity loans, would-be borrowers are usually given three choices: 80/20 home loans, 100 home loans, or 125 home loans. These options represent increasingly riskier and higher interest options available to homeowners. While the 80/20 home equity loan provides fantastic interest rates useful for consolidating debt, a 125 home loan, also called “a second mortgage,” is a risky venture which, unfortunately, is sometimes the only option.

Those numbers—80/20, 100, and 125—refer to equity, a financial term for the amount of money paid on a major purchase. Equity is important to banks because it shows them that a borrower has a constant income capable of making regular payments. It also represents an asset that fully belongs to a borrower, which makes it good collateral against a loan. If a borrower defaults on a home equity loan, then the bank will seize their house to get the money they were promised.

An 80/20 home equity loan means that a bank will lend up to 80% of the money paid on a house, and then only if at least 20% has been paid. Getting an 80/20 home equity loan is a sign of healthy credit, and the low interest rates will limit much of the expenses of borrowing. A 100 home equity loan is available to borrowers with good credit who have made some payments—quite simply, it allows a homeowner to borrow up to 100% of the money they have spent on their home.

A 125 home loan means that borrowers can borrow 125% of their investment. Such a loan is risky to both the bank and the borrower, as it relies on money which no one really has. This is such a departure from the relative security of other home equity loans that it has earned two nicknames: a second mortgage or a no equity loan. These loans are “no equity” because they are loans given with no equity for collateral, and “second mortgage” because almost no one starts out with a 125 home loan. Rather, borrowers reach their credit limit on a 100 home loan and thus get more capital in exchange for higher interest rates. These higher interest rates are what make the 125 home loan an inferior investment to 100s and 80/20s, especially when home equity loans are being used to consolidate existing debts.

The global recession of the late 00s owes some of its notoriety to the 125 home loan trend. This is not to say that the option does not work for certain borrowers—however, banks must be careful not to gamble on risky borrowers who may default on a loan and leave the bank with a foreclosed house not worth as much as the capital they thought they had.

These loans can also come with provisions and red tape that cost more in the long term. In addition to high interest rates, many banks will offer low introductory rates such as 0% APR for 1 year. Shortsighted consumers sometimes land in painfully large interest rates after committing to a contract decorated with offers like this one. Furthermore, some loans smuggle hidden fees into their contract, advertising lower rates than their competitors by shuffling costs to different stages of the buying process. Packing fees, credit insurance, and other fees worm their way into these agreements when contracts are not read carefully.

Even if a borrower is confident in his or her ability to quickly pay a 125 home loan, circumstances can arise which throw even the best-laid plans into disarray, including unemployment, disability, unplanned moves, and other significant changes in cash flow.

For the majority of borrowers, a 125 home loan is an emergency source of income when no other options are available. When finances get to that point, borrowers have no choice but to settle for inferior rates. Otherwise, the vast majority of borrowers should avoid these “second mortgage,” “no equity,” 125 home loans.