Personal Finance

Take Control of Your Financial Future…!

The 125 loan is an actual loan product being offered to the consumer today as enticement to borrow money from a particular lender. In today’s market of racing real estate prices and the extremely low interest rates offered by mortgage lenders, the 125 loan has become a popular product.

Many borrowers turn to 125 loans because they can simply make one payment to their lender instead of several payments to many lenders. The single payment is often lower than the total of all the payments it replaces, due to differences in interest rates.

The rates are often much better than credit card rates, but if you roll other loans in, such as student loans, you may actually be raising some rates on your debt.

Your potential home is worth $100,000, and you’re allowed to borrow $125,000. The seller is only asking $85,000 for the hundred thousand dollar home, this means you’re able to borrow $40,000 above the asking price for the home. That leaves an awful lot of money on the table, and you may do what ever you choose with the $40,000. This is a very tempting situation for many young consumers.

What might they choose to do with $40,000? Some may buy cars, some may take vacations, and some may simply spend $40,000. Is this the wise choice? The choice for the mortgage lender: absolutely, for the consumer probably not.

Although the interest is completely tax-deductible, and the payment may be affordable, it is not allow the consumer to build equity in their home DYogya. It promotes excessive spending habits without regard to the consequence of a mortgage that is more than a home is actually worth.

The 125 loan is a great advertising tool, it’s a great way to sell mortgages; but it’s not often a great buy for the consumer. Unless, you take the remaining funds, the $40,000, and make improvements upon the home and reinvest the money in the home.

Now the home’s value has increased, is now worth $150,000 and you have only a $125,000 mortgage. From the consumer standpoint, this is a great benefit it and it was only possible by way of the 125 loan.

The real danger comes in when borrowers take out a 125 loan, roll over their credit card debt and then go out and max out those cards again. This is called reloading. You now have double the debt to repay. You are in a worse situation now and are risking losing your home.

When you take out a 125 loan, you have to be dedicated enough to cut up each credit card at the moment. This will help you avoid temptation.

You may be saying, but wait — I get to deduct the interest on a 125 on my income taxes. Yes, you are saving 28 cents for every dollar you spend. Doesn’t make a lot of sense. Plus, the amount of interest on the loan above the value of your home is not tax deductible. If you deduct it, it will bite you in the taxes.

You are also now upside down in your home equity. You owe more than your home is worth. You can’t sell it until the value of the house increases or you pay off the loan enough to reduce the balance below the value of the house. That takes around five to 10 years in most cases.

If you are forced to sell your home, you will probably have to pay money at closing just to get it off your hands. You are paying to sell your home. If you plan to stay in your home for a long time, you may not need to worry about this as much.