Secure Home Equity Loans
Does “a home equity loan is secured by more than the value of your home” sound like an oxymoron? The security is where? Coined by a clever Wall Street person, it meant lending money to someone with perfect credit, while their home is held as security, had some risk but they planned to adjust for it in pricing. This type of loan, called a “secured signature loan,” could probably steal some business from the credit card companies, or at worst – augment it.
This 125% home equity loan, often referred to as the “125% NO EQUITY LOAN” allowed the homeowner to borrow up to 25% more than their home is really worth. Of course there are lots of caveats, and they change dramatically state to state: maximum loan of $125,000; no more than $50,000 cash; some of the loan must be used for home improvement projects. Even though these are 2nd mortgages, they can be used as a first.
Several less obvious benefits, such as the interest portion, may and, I repeat MAY, possibly be tax deductible. Please be sure and check with your tax advisers on this one, but there are concerns that arise when the equity borrowed exceeds the purchase price. And the rate of interest on a home equity loan is normally lower than the long term rate for most credit cards.
A major problem to watch for can occur if you need or have to sell your home; unless value of your home has risen at least 25%, you may actually have to pay a buyer to purchase it. Also ponder the question before taking one of these mortgages – what happens if you lose your home through a foreclosure and the IRS claims it’s debt relief?
So why did this so popular 125% home equity loan disappear, or at least suddenly become to hard to find? Simply put, the buyers disappeared for firms that packaged and purchased these loans. Like most all mortgage debt, loans like this are put together in blocks, then sold to insurance companies, pension plans, or you and I as part of mutual funds or bond funds. One of two things can happen when there is a larger than expected default rate. Package buyers either change their pricing or, if there’s major problems, they drop their purchases completely.
Now for the good news. The 125% home equity loan is back – re-designed, re-priced, and re-instituted. What actually happened is “back by popular demand.” When you have such a market hungry for a product, someone will take a chance. Wall Street will find a way when there’s a lot of money to be made.