Lenders that offer 125% home equity loans allow you to borrow the full amount of the equity you have in your home, plus an additional 25%. For example, if you have $10,000 of equity in your home, and you take out a 125% home equity mortgage, you would be able to borrow $12,500 on your home. This is beneficial for home owners who do not have a lot of equity in their home but want to borrow money to make home improvements. If you are considering taking out a 125% home equity loan, there are some things you need to know.

You Will Need Great Credit

Because the additional 25% of your loan is unsecured, lenders will generally only offer 125% home equity loans to borrowers with good credit histories.

Selling Your Home May Not Be an Option

If you were to try to sell your home, you would have to pay off both your original mortgage and your home equity loan. Because you have borrowed more than your home is worth, you may not be able to sell your home until you’ve repaid at least the additional 25% that you originally borrowed.

Unsecured Loans Carry Higher Interest Rates

Because the extra 25% is not secured by any collateral, the lender will consider the loan to be higher risk than a normal home equity loan. This means that you will most likely be charged a higher interest rate than you would if you took out a traditional home equity mortgage.

Borrowers should be certain that they can afford the monthly payments of their home equity loan. Keep in mind that the monthly payments for this loan are in addition to your current mortgage payment.

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