Be Wary of 125 loans
There are several loans out there that are available to different types of consumers. But not all loans are deemed beneficial to everyone. There is a particular loan that people should be cautious about: the 125 secured loans.
The 125% equity taken from your home value is the basis for the name of this loan. This type of loan is a mixed type because some of the loan amount which will be granted to you is covered by the outstanding home value while the remaining is not. The portion which is not covered by your home value would cause your interest rate to shoot up.
The ability to make a single payment rather than paying several ones is usually the reason why many borrowers are attracted to the 125 secured loans. The single payment usually carries with it a lower interest rate as compared to the total interest rate of all the payments that it replaces. Some debt payments, like credit card, carry a higher interest rate but for student loans, the interest rate is lower. Careful computations of rolled up interest rates should be done before carrying it over to a single 125 loan. There is always a possibility that you will end up paying a bigger debt due to the higher interest rate upon roll up.
One mistake that a borrower usually makes is to borrow a 125 loan to pay for a credit card debt. After rolling over the loan amount into the outstanding amount, they would then max out their credit cards and would result to another debt payment. This event is called reloading. This puts the borrower in an even worse situation and will have a greater risk of losing his home or whatever is declared as collateral.
To avoid more trouble and temptation, it is advised that you cut up your credit cards upon the grant of a 125 secured loan. Constant dedication to your payments would assure you lesser troubles in the future.
You may also consider the fact that you can deduct the interest on a 125 from your income taxes. That somehow would equate to saving 28 cents for a dollar that you spend. However, it would still not make any sense because the loan interest above your home value is not tax deductible.
This will then result to you having a higher debt compared to your home value. You will not be able to sell the house until it increases in value or you are able to pay the loan amount that is enough to make your home value greater than your outstanding loan balance. In most cases, that would take you around 5 to 10 years.
So the next time you would think of getting a 125 secured loan, unexpected things happen. Getting rid of a debt for another one just puts your house on a line.
