Be Careful With 125 Loans

Be Careful With 125 Loans
Many borrowers think they have found the​ perfect loan -- the​ 125 .​
But you​ should be cautious when considering this product.
A 125 loan is​ named for the​ amount of​ equity you​ can pull out of​ your home,​ which is​ usually 125% .​
Some of​ the​ loan is​ secured by your home and some of​ it​ isn't,​ making it​ a​ mixed loan type .​
The portion that is​ unsecured causes your interest rate to​ be higher than with a​ fully secured home equity loan.
Many borrowers turn to​ 125 loans because they can simply make one payment to​ their lender instead of​ several payments to​ many lenders .​
The single payment is​ often lower 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 actually be raising some rates on​ your debt.
For example,​ you​ may have a​ car loan with a​ balance of​ $11,​000 .​
You have an​ interest 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 actually 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 cards again .​
This is​ called reloading .​
You now have double the​ debt to​ repay .​
You are in​ a​ worse situation now 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 taxes .​
Yes,​ you​ are saving 28 cents for every dollar you​ spend .​
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 now upside down in​ your home equity .​
You owe more than your home is​ worth .​
You can't sell it​ until the​ value of​ the​ house increases or​ you​ pay off the​ loan enough to​ reduce the​ balance below the​ value of​ the​ house .​
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​ closing 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 this as​ much.
But keep in​ mind that the​ unexpected 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 option .​
It certainly isn't the​ easy way out,​ as​ you​ may have been told .​
It is​ the​ same debt,​ just new place .​
Be very careful,​ it's your house on​ the​ line this time.

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