Four Tips for Using the 125 Percent Home Equity Loan

A recent addition to the lending landscape, the 125 percent home equity loan was created in response to our insatiable need to borrow. In a nutshell, this loan allows you to borrow up to 125 percent of your home's value. If your home is worth $100,000 and your mortgages total up to $100,000, the 125 percent loan allows you to borrow an extra $25,000. If you want to indulge in this type of borrowing, here are four tips to know about before you decide to apply.

1. Don't plan on moving. This loan isn't for you if you want to relocate in the near future. Since you'll owe more than your home is worth, you may not be able to sell it for a high enough price to pay off your mortgage.
2. Keep your credit clean. The 125 percent loan is a risky proposition for a lender. If a borrower can't make payments, the lender could get stuck with a home that has no equity. As a result, lenders generally will only grant this type of loan if you have excellent credit.
3. Prepare for a high mortgage rates. The more equity you tap, the higher interest rate you'll have to pay. Budget your money to ensure that you can afford the higher monthly payments.
4. Use it for debt consolidation. Even if the rates are high, using the 125 percent loan to consolidate debt isn't such a bad move. The high rates on the loan are generally lower than the even-higher rates of credit cards. A 125 percent loan could actually save you money.

Make no mistake-this loan can be a risky proposition. However, if you use it as short-term debt to improve your long-term financial situation, it may be an intelligent move. If you use it to consolidate debts instead of buying a big screen TV, then "125" could indeed be your lucky number.