With the 125% loan, the home owner is able to borrow more than the actual value of the home. The actual amount available to be borrowed in a 125% loan is dependent upon the real estate value of the home and the amount already owed on the home through a mortgage or other loan program. The 125% loan is often used to access cash for large purchases. The 125% loan may also be used to make home improvements and increase the real estate value of the home. Because the 125% is a partially unsecured loan it may have higher rates than other home mortgage loans.
The 125% loan translated into dollars
The 125% loan uses a calculation of home value percentage to determine the amount available for the loan. The125% loan means that you are able to access more than the total amount of the homes value up to 125% of the total value of the home. (This number is calculated by dividing the worth of the home by four and adding this number to the worth of the home.) However, this does not mean that you will be able to automatically get, in cash, 125% of the homes value. The 125% loan is calculated by determining the value of the home, multiplying that value by 125% and then subtracting the outstanding amount owed on the home.
Real estate value changes over time
The real estate market fluctuates and the value of your home will change over time, usually increasing if the home is properly maintained. The 125% loan is based upon the value of your home at the time of the loan. If the value of the home has increased significantly since the home was first purchased, the 125% loan may actually give you significantly more money than you need to repay the first loan and make home improvements. Home improvements will further increase the market value of your home, creating the potential for generating enough revenue through rental or sale of the home to repay the 125% loan.
Using the money from the 125% loan
The money obtained from the 125% loan may be used for any large purchases. However, it is usually wise to first use the money to repay any other outstanding loans on the home. The reason for this is that it is difficult to pay two monthly mortgage bills each month which is effectively the case when you take out the 125% loan on a home which already has an outstanding mortgage.
Partially secured loan
The 125% loan is a partially secured loan which uses the home as equity. Because the total amount of the loan is more than the actual value of the home, that portion of the 125% loan which exceeds the value of the home is not secured by home equity. This makes the 125% loan a somewhat risky investment to lenders. Because of this the 125% loan sometimes has a higher interest rate than a standard mortgage loan. In fact, the interest rate may be different on the unsecured portion of the 125% loan than on the portion of the 125% loan which is secured by home equity. The actual rates and amount of repayment of the 125% loan will depend upon the credit of the borrower and the total amount borrowed.
Martin Lukac, represents RateEmpire.com, a finance web-company specializing in real estate/mortgage market. We specialize in daily updates, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies! Visit http://www.RateEmpire.com today