125 % Home Equity Loan

A home equity loan is a loan secured by a second deed of trust on a house.

The amount of the loan that you are eligible for is based on the available equity in your real estate property, as well as other criteria such as your income level, your existing liabilities, etc. As home equity loan are classified as term loans, you can only drawdown on the loan once. The interest rate and the repayment periods are typically fixed. Your repayment amount is fixed and standardized across the life of the loan. Home equity loans are preferable over other personal loans as the interest rates on these loans are significantly lower, and in most cases, the interest paid on a loan of up to an amount of $100,000 is tax-deductible.

With a home equity line, the maximum amount you may borrow is set at a percentage of the equity that is built up. A 125% home equity loan means that one can avail a loan up to the difference between 125% of the property appraised value and any claims on the property. Let's say you bought your home for $100,000 with a down payment of $20,000. You then took a first mortgage for $80,000. Over the next few years, your mortgage payments are applied towards the principal amount and interest costs. Let's say you've paid $10,000 toward the principal. At the same time, market demand on homes in your area has pushed up the price on your property, and your home is now worth $120,000. With a 125% home equity loan, and considering that all of your other risk criteria are accounted for, you can avail a loan amount of up to $80,000 - your current property value times 125% minus the amount still owed on the mortgage of $70,000.

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