125% Home Equity Loans: No Equity Financing for Extra Cash & Debt Consolidation

Tip! Some lenders of home equity loans offer low introductory rates that might look like a great deal but these deals usually revert automatically to higher home equity loan interest rates.

If you want to lower your monthly mortgage payment and need some extra cash on the side but haven’t owned your home long enough to build up equity, there is a solution.

We’re talking about a 125% home equity loan. The loan basically allows you to borrow 25% more than your homes fair market value or FMV. For example, if your home is worth $300,000 a lender could finance a new loan for $375,000 giving the borrower an extra $75,000. This no equity loan becomes very useful, because it allows you to consolidate credit cards that usually have higher interest into the loan.

There are two types of 125% home equity loans; close-ended and open-ended. A close ended loan is simply a second mortgage. The loan has a set time limit, such as 15 or 30 years, and the amount of the payments don’t fluctuate because the interest rate is fixed. At closing, the lender usually pays off the pre-existing mortgage and gives the borrower the extra cash or “equity” in one lump sum. First time homebuyers even get the opportunity to qualify for a 125 second loan, because you don't need to have earned any equity.

An open-ended home equity loan uses your home as collateral for a line of credit. The lender sets up an amount of cash the borrower has access to use, and the borrower may spend the cash all at once or whenever he or she chooses, using a credit card, checks or both to pull from the account. The application process is very similar to a traditional close-ended loan with title search, appraisal, attorneys and points. “In addition to upfront closing costs, some lenders require you to pay continuing fees throughout the life of the loan.” According to the Federal Trade Commission, “These may include an annual membership or participation fee, which is due whether or not you use the account, and/or a transaction fee, which is charged each time you borrow money.”

Nick Rian is an award-winning journalist whose journalism credits include awards from the Associated Press, Wisconsin Broadcaster's Association and The Milwaukee Press Club. You may find more information about home refinancing, and read more of Nick's articles at BD Home Equity Loans. You can get more advice for first time home buyers and 125% home equity loans and get more information about and refinancing for people with all types of credit. Look for great interest rates on home equity credit lines and second mortgageswith no application fees.

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