Common Pitfalls of a 125% Home Equity Loan

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A 125% home equity loan is not without its dangers. Consider the following information before you consider applying for a 125% home equity loan.

General Risks
You may need to move. If you need to relocate because of your job, you may have to sell your home earlier than you originally planned. At best, you may be able to recover only 80-90% of your home's value in the current market. You will still be responsible for the 125% home equity loan you took, though.

You could lose your income. Again, selling your home may not help your situation, as the sale is likely to fall short of the amount of money that you borrowed.

Other Pitfalls

  • High interest rates: While a lender may offer very low monthly payments that seem manageable, the interest can be higher than that of some credit cards. Consider the amount of interest you will be paying over time. You could end up paying two to three times the amount originally borrowed.
  • Hidden fees: Watch out for last minute fees that you may not have noticed when you applied. Be sure to read all of the terms carefully and make sure that there aren't any charges that you have not been notified of verbally.
  • Low introductory rates: If you opt for a home equity loan that offers a very low interest rate, make sure that you know how much you will be charged once the introductory rate period expires. The interest could spike after 6 or 12 months, and could end up costing you more than getting a fixed rate at the beginning.