Be Careful With 125 Loans
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Be Cautious with 125 Loans
Many borrowers believe they've discovered the ideal loan with the 125, but it's important to approach this option with caution.
A 125 loan allows you to borrow up to 125% of your home's equity. Some of the loan is secured by your home, while the remainder is unsecured, resulting in higher interest rates compared to a fully secured home equity loan.
Borrowers often choose 125 loans for the convenience of making a single payment, which can be lower than multiple individual payments due to varying interest rates. While these rates are often better than credit card rates, rolling in other debts, such as student loans, might inadvertently increase your interest rates.
For instance, if you fold a car loan with an $11,000 balance at 8.5% interest into a 125 loan at 11.5%, you've increased your rate. Conversely, reducing a credit card's 19% rate to 11.5% may seem beneficial, but you'll be facing longer repayment terms of up to ten years.
The primary risk arises when borrowers take out a 125 loan, consolidate their credit card debt, and then max out those cards again?"a situation known as reloading. This leads to double the debt and jeopardizes your home.
To avoid this, it's crucial to destroy your credit cards immediately after taking out a 125 loan to resist temptation.
You might think the interest on a 125 loan is tax-deductible, but you're only saving 28 cents per dollar spent. Moreover, the interest on the loan amount exceeding your home's value is not deductible, potentially leading to tax issues.
Additionally, you'll find yourself upside down on your home equity, owing more than your home is worth. Selling becomes difficult unless your home's value increases or you pay down the loan sufficiently, a process that can take five to ten years.
If you must sell your home, you might have to pay at closing just to offload it, effectively paying to sell your house. If you plan to stay long-term, this may be less concerning, but life's unpredictability means it's a risk.
Ultimately, incurring significant debt through a 125 loan can jeopardize your future. It's not necessarily the best option to eliminate debt, nor is it the easy fix you might assume. It's simply shifting the same debt to a new place, with your house on the line. Be extremely cautious.
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