Is the 125 percent mortgage for you?
Julie Garton-Good, GRI, DREI

They're all the rage right now--mortgages that total up to 125 percent of your property's value. And if the lure of pulling extra equity out of your home has you looking twice, be sure to check out the facts before you take the plunge.

In fact, some homeowners report that taking out a mortgage larger than the value of their homes was something they should have thought about longer and harder. Some say reality set in when they sold the home and had to bring a check to closing--rather than receive one there. Others admit that the impact of over-leveraging really hit home when the higher payments became tough to manage and they fell behind. While tapping 125 percent of your home's value doesn't have to be a negative experience, it does need to occur for the right reasons.

Why are lenders making 125 percent loans? Who is being approved for them? They are being made in hopes that (1) appreciation will continue to increase the market value of the property and (2) that the homeowner wouldn't need to sell the house until the debt is paid down. Most lenders require that the borrowers of 125 percent equity have stellar credit. And since a strong credit picture is exactly what the borrower wants to keep, lenders feel that there's a better-than-normal chance that these loans will be repaid.

But unfortunately, it's not a perfect world. Buyers get transferred unexpectedly and have to sell. Families have financial problems and feel the crunch of higher payments.

So how can you evaluate whether a 125 percent loan is appropriate for your situation? First, is your home in a stable neighborhood with above-average appreciation? If so, this will do much to help your home's value rise above the heavy debt.

Second, is it likely that you'll keep the home (and the loan) long enough to whittle down the debt below what the property could sell for? Actually, to be completely on the safe side, you should add an estimate of sales costs to that number (since that would come out of your equity). And be sure to make this calculation based on the lowest price your home might bring--not on the highest.

While a 125 percent mortgage might be just what the doctor ordered to fix a current financial problem, first make certain that you're not making yourself ill long-term by taking the plunge.