A 125 home loan or to be more precise, a 125% home loan is a subtype of a home equity loan that allows borrowers to ask up to 25% more of their property’s value. To give you a more definite meaning of what a 125 home loan is, we must look into the definition first of a home equity loan.

Home Equity Loans

Home equity loans (HEL) are also known as second mortgages. This kind of home loan entails borrowers to use their properties as collateral: an asset that is to be forfeited if the borrower is unable to pay back the principal and interest of the loan. HEL and its respective line of credit usually have shorter terms than the first mortgage taken out of the house. When you obtain an HEL, you are also submitting your property as a lien to the lending company. And that lien must be paid for in full before you could actually sell or transfer ownership rights of the said property.

There are two types of HEL: closed end (where the borrower opts for a lump sum, usually the maximum amount of money in one transaction, and cannot extend the loan further); and open end (where the borrower chooses when and how often he or she can borrow against his property’s equity.) Subtypes of HEL include: bad credit HEL; debt consolidation HEL; home improvement loan; 100 home loan (100% home loan); and 125 home loan (125% home loan.)

What is a 125 home loan?

Many people take out a HEL in order to pay for emergency expenses or as a way of financing college degrees or home improvement projects. Often too, a HEL is used as a useful debt consolidating tool. Aside from having an existing mortgage loan (or remortgage loan,) the 125 home loan borrower should also have a good credit history, a good credit rating and a steady income as of the moment.

Lending institutions will appraise the property in question, but a borrower can apply for over-equity loans or loans which exceed the equity worth of the house. As the name of the loan suggests, the borrower can loan up to 25% more than the actual equity against the house. Not all loans amount to the same monetary units. A lot is dependent on the appraisal of the property in question. The higher the value of the house, the higher the loan amount the borrower could ask for.

However, there is one major issue to consider when taking out a loan of this type.

The fact that, given the unfortunate circumstance that the borrower cannot pay back the said loan, the property automatically defaults to the lender is an issue not to be taken lightly. And if that isn’t enough, the borrower also has to pay for the lien set against the property before there is a transfer of ownership title. It is therefore imperative that if you are taking out a 125% home loan, that it is large enough to pay for monthly expenses; pay back earlier loans; and still have enough money to save at the end of the day.