125% Home Equity Loan – a Great Option for Little Equity

Are you someone who is in a situation where you have only recently purchased your home and just haven’t built up any equity in it yet? Are you wanting to get your hands on some cash in order to make some home improvements, but don’t know where to turn to get it? Well, you are not alone. The solution to this problem may be in getting a 125% home equity loan.
As a second mortgage, a 125% home equity loan is designed to give the borrower up to 25% more of what their home’s value actually is. As an example, let’s say your home is currently valued at $150,000. Your mortgage still has a balance of $150,000. You could get a loan for $37,500 with this type of lending program.

The key in being approved for this type of home equity loan will of course be your credit score. Due to the structure of this type of loan, financial lenders are looking for well qualified borrowers, so if your credit is less than perfect, then this type of loan would not be a good fit for you to try and obtain.

Finding lenders is not difficult. You can easily do a search on the internet and find a wide variety of lenders who specialize in these loans. Each one will have their own sets of criteria and rules, but the differences are usually minimal. Some may require that you’ve owned your home at least 6 months, while others will use your credit score to determine the maximum amount they will loan you. The key will be in the fees. Be sure to read everything and understand what the fees will be before signing any paperwork.

A 125% home equity loan should not require any type of an appraisal on your property. Since you have only lived in your home a short amount of time they will base the loan amount on the sale price of your home.

Now, if you have lived in your home more than 12 months, lenders may use what is called a drive-by appraisal, a current tax assessment on the property, or an AVM. This is simply an estimation of what your home is worth based on what other home in your neighborhood have recently sold for.

So, if you do not have a great deal of equity built up in your home, don’t think you should just give up. Take a serious look into a 125% home equity loan and you may just find exactly what you were looking for.

Using a HELOC to Pay off Credit Card Debt: Pros and Cons

Credit card interest rates are high. They may not be as oppressive as payday loans, but they are still excessive as they sometimes begin at rates exceeding 20%.

As some consumers calculate the rising level of credit card debt they have, they may consider their options in eradicating the debt to include consolidations, which should only be used as an absolute last resort before the option of bankruptcy. But other than these options, there is always the choice of taking money out on one’s home equity, commonly called a HELOC for Home Equity Line of Credit.

What is a HELOC?

When a person owns a home with a mortgage there are two kinds of money. The first is the money owed on the loan, called the principal, and the second is the difference between what the house is worth, and what is owed on it, called equity.

If a family had $20,000 in credit card debt while owning a $200,000 home of which $100,000 was owed on the mortgage, it would not be hard for this family to take out a loan for the credit card debt amount (or more) using the equity as collateral. This line of credit is a HELOC. While it is a simple procedure to execute, it is not without its pros and cons.

Taking out a HELOC to pay off Credit Card Debt: Pros

The best reason to take out a HELOC to pay off the above credit cards is to be rid of the high interest debt. Where the family was once beholden to a creditor for $20,000 at 23.9%, they may have transferred the debt amount to a lender who only wants 8.9% interest.

Another positive is that the limits will increase on the cards that were paid off. This is not a guarantee, but it has been my personal experience that when I have had a high balance on my credit card and then paid it off, my limit went up. This higher limit brings one’s debt to credit ratio down, making him or her a more desirable candidate for loans in the future, which can also be a con.

Cons to Reducing Obligations via a Home Equity Line of Credit

The biggest con to this transaction is that it encourages people to utilize their home as a means of paying for consumer items. The credit card debt would be a result of a variety of spending to include air fare, dining in fine restaurants, going to Starbucks for a cup of coffee, and even paying for one’s cell phone bill.

While it is one’s right to use their home’s equity, or any other part of their net worth, in the ways that please them, there may come a time when spending habits will exceed one’s ability to keep up with them. After all, much of a mortgage payment goes to interest, making the equity one gains comparable to a tortoise (paying down the mortgage) racing a hare (credit card spending) that may not stop to sleep on its way to the finish line.

Another con is having the same amount of debt, but just by another name, freeing up the credit cards to be used even more freely than before. Psychologically, this could lead to even more credit card spending, especially when one gets cash back rewards.

Overall, HELOCs are not the best way to go, but they should be considered before getting involved in a debt consolidation, and would be much more preferable to filing for bankruptcy.