We wanted to write a post about the dangers of 125% Secured Loans, because there are certainly downsides to these deals as well as upsides. And in the interests of balance, it is important that some of those downsides are pointed out to would-be borrowers.
The problem is of course that it tends to be people with poorer credit who generally apply for these types of loan rather than those with an excellent credit history. And over the last few years, when it comes to how they have dealt with sub-prime or non-prime borrowers, mortgage lenders haven’t exactly come up smelling of roses, have they?
The recent economic crisis was triggered by sub-prime debt being re-packaged and sold on to investors in the form of “structured investment vehicles” and “credit default swaps”. As a result of that, there have been more bank foreclosures on mortgages loans over the last few years than at any time since the Great Depression of the 1930’s.
Of course, we can’t lay all the blame for the recent economic decline of Western civilization on 125 Secured Loans! But some lenders can be quite predatory regarding these loans, even now in the wake of the sub-prime debacle.
So there are some key things you should consider as a borrower.
First of all, why do you want/need to borrow 125% of the current value of your property?
If it is to improve your home so that the value increases by more than 25% for example, then all well and good. You can borrow the money, make the improvements, sell your home and pay the money back hopefully with some cash left over as a deposit on your next property purchase.
If it is to pay for an expensive holiday or a new set of wheels though, then you should think long and hard about what you are doing. Yes, you will probably find a lender willing to grant you a 125 secured loan, but at what cost? First of all the interest rates are likely to be a lot higher than they would be on a mortgage of less than 100% of your property’s value. Secondly, what happens if the value of your property goes down? Or what happens if you lose your job?
And you also need to think about the tax implications. In the US, you can only obtain tax relief on a home equity loan or mortgage up to your home’s fair market value. Beyond that, there are no tax breaks. So if you think you can write of the interest payments on that extra 25% against taxes, watch out! The IRS might have you in its sights!
And even if you are borrowing for home improvements, not all home improvements will increase the value of your home by the amount of money you have borrowed to have them done. Particularly in a declining or stagnant market.
In conclusion, 125 secured loans can make a lot of sense and can free up needed capital. But there are downsides, so never take out this kind of loan without thinking long and hard and considering all the pros and cons.
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