|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
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
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.