The 125 Percent Second Mortgage Home Loan

A second mortgage home loan is secured by the equity in your home. Your equity is the difference between the value of your home in today’s market and what you owe on your home.

With housing prices rising, the equity in most homes rises as well. At some point you may wish to use your equity for some reason. Perhaps you wish to make an investment, or to make home improvements, or to pay off other debts, or to pay for college costs, or even to take a long over-due vacation.

But what if the equity in your home is not sufficient to cover a loan for the amount of money you need? To cover this situation, lenders have come up with the 125 percent second mortgage home loan. This loan allows a borrower to get a loan for 125 percent of the equity in the property.

To get a 125 percent loan an appraisal is generally required (something not always required with a more conventional second mortgage) and the borrower’s credit is looked at more closely than is typical with most second mortgages, as well as the borrower’s loan to debt ratio. Note: This is the total amount of debt being carried by the borrower compared to the amount of the new loan.

Since a portion of the lender’s money is not secured when a 125 percent second mortgage is made, lenders tend to charge a higher rate of interest to cover their added risk.

Still, depending on how badly you need the money, or on what use the money will be put to, the added paperwork and the added scrutiny and the added cost may make a 125 percent second mortgage home loan an attractive alternative.