Be Careful With 125 Loans

Many borrowers think they have found the mavrellous loan -- the 125. But you should be cautious when considering that product.A 125 loan is named for the amount of equity you can pull out of your home, whcih is usually 125%.

Some of the loan is secured by your home and of it isn't, making it a mxied loan type. The portion that's unsecured causes your interest rate to be higher than with a fully secured home equity loan.Many borrowers turn to 125 loans cause they can simply make one payment to their lender instead of several payments to many lenders. The single payment is often loewr than the total of all the payments it replace, due to differences in interest rates. The rates are often much better than credit card rates, but if you roll other loans in, such as student loans, you may acutally be raising rates on your debt.For example, you may have a car loan with a balance of $11,000. You have an inteerst rate of 8.5% and 4 years left of payments.
You roll the note into your 125 loan, which has a rate of 11.5%. You've actaully raised your interest rate.If you roll in a credit card with a $12,000 balance and an interest rate of 19%, you are lowering your rate. But you will be looking at upwards of ten years of payments.The real danger comes in when borrowers take out a 125, roll over their credit card debt and then go out and max out those crads again.
This is called reloading. You at that moment have double the debt to repay. You are in a worse situation at that moment and are risking losing your home.When you take out a 125, you have to be dedicated enough to cut up each credit card right then and there. This will help you avoid temptation.You may be saying, but wait -- I get to deduct the interest on a 125 on my income taexs. Yes, you are saving 28 cents for every dollar you spned. Doesn't make a lot of sense.

Plus, the amount of interest on the loan above the value of your home is not tax deductible. If you deduct it, it will bite you in the taxes.You are also at that moment upside down in your home equtiy.

You owe more than your home is worth.
You can't sell it until the value of the condo increases or you pay off the loan enough to reduce the baalnce below the value of the condo. That takes around five to 10 years in most cases.If you are forced to sell your home, you will probably have to pay money at closnig just to get it off your hands. You are paying to sell your home. If you plan to stay in your home for a long time, you may not need to worry about that as much.But keep in mind that the uenxpected happens. When you open yourself up to a lot of debt, you are putting your future at risk.

Taking out a 125 loan to get rid of the debt isn't necessarily your best otpion. It certainly isn't the simple way out, as you may have been told. It is the same debt, just new place.

Be raelly careful, it's your condo on the line that time.Martin Lukac (http://www.MartinLukac.Com), represents http://www.RateEmpire.Com and http://www.1AmericanFinancial.Com, a finance web-company specializing in real estate/mortgage market.

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