With my current financial situation, I have been considering options to consolidate down some debts and possibily lower some of my payments (and personally I perfer one payment to having to make 10, even if the per-month cost is the same). I have already tapped in my 401K as a short-term cashflow fix. And although things are improving overall, there is alot of housework that should (and some that must) be done. Books to publish for which I obviously do not currently have enough cash to print in sufficent quantities to get the best return on investment….
Another option i’ve been thinking about is getting a new 2nd Mortgage on our house. The plus is since we bought the house at lower than market value, the technically have a little equity in it. The drawback is that if we had the house re-apraised and got a loan for 100%, this would probably be only sufficent to consolidate our debts. So i’ve started looking at 125% loans as a possible option but do have some worries about the risks involved… Taken from: http://www.echobayloans.com/32/125-equity-loan.html
1.What will you do if you decide to sell or if you have to sell?
In all likelihood, you will be left owing money on a home you no longer live in. Refinancing this debt can be difficult as well because it is no longer secured by real estate.
For me this is a non-issue as this house is planned as being our final house. Of course, no one can predict the future but this is something that isn’t planned so it doesn’t worry me so much…
2.What will you do if the value of your home decreases?
In most cases, real estate is an appreciating asset but there have been situations where the bottom has fell out of the real estate market. If this happens to you and you took out a 125% home equity mortgage before values nose-dived, you will find yourself in a downward spiral.
This is my main concern with a loan that is more than 100%. The housing market has been bubbling up over the past 5-10 years and it is a big worry that at some point the bubble might pop. The bubble isn’t as bad in the Puget Sound area than in the San Francisco area for example. But then if and when the bubble does pop, what happens???
3.Did you know the interest will not be tax deductible?
Many homeowners mistakenly believe that all interest paid on their home is tax deductible. Interest typically can be deducted but only on loans that do not exceed the value of your home.
This doesn’t really concern me as long as the 100% of the LTV interest is tax deductible.
4.Have you considered the difference in interest rates?
When you finance more on your home than it is worth, there is more risk involved for the lender. More risk for the lender equals a higher interest rate for you. This higher rate results in even more paid out of pocket every month.
Not sure of the rate I can qualify for at this point since I have not applied. Obviously the rate on a 125% loan is going to be more than a 100% loan. But it would be used to consolidate some debt which is at a higher rate. Also, if I can make the leftover money work at a rate greater than the interest rate than this would reduce my overall costs.
Argh. Not an easy call. I know that the straightforward answer is that a 125% loan is generally not a good idea. But on the other hand, the excess money could be used to speed up my publishing business and therefore generate more side-income quickly. In this “need money to make money” world, seems like such a loan might be a good way to get my home business growing faster.