Why No Equity Mortgage Loans Can Be Dangerous

If you are a homeowner, chances are you have heard about the growing trend in the real estate market in which borrowers can get a mortgage with no money down. In the home equity loan market, there is a growing availability of so-called 125% LTV (loan to value) home equity loans. This means that the lender gives the homeowner 125% of the value of the home.

These 125% LTV loans are an offshoot of the traditional second mortgage, but while those earlier second mortgages were restricted to projects that would increase the value of the home, these new loans are most often used to consolidate and pay off other debt.

Homeowners can use the proceeds of such a home equity loan to pay off troublesome credit card and other debt while reducing the monthly payment due on the home, making them a good choice for some homeowners. It is important to be careful, however, and homeowners should think long and hard before borrowing 125%, or even 100% of the value of the home. Not having equity in the home is a dangerous situation, and if prices were to fall the homeowner could end up in the uncomfortable position of owing more than the home is worth.

It is important for homeowners to understand that in most cases these no equity loans and negative equity loans will require a good income, and a good credit score. In most cases, the homeowner will need to have a FICO score of at least 650-700 in order to qualify for a 125% LTV loan. This score is significantly higher than the national average, which falls somewhere between 620 and 650.

While home equity loans in general, and 125% LTV loans in particular, can be quite attractive to those who find themselves struggling under high levels of credit card debt, it is important to be careful, and to exercise extreme caution and fiscal discipline. With a home equity loan, the homeowner is essentially converting unsecured debt, such as credit card loans, into a loan that is secured by the home itself. It is vital for the homeowner to get his or her spending under control prior taking out any kind of home equity loan to pay off debts.



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