Why a 125% Home Equity Loan Can Be A Worthwhile Option

Approving a 125% home equity loan can seem like an act of foolishness by some lenders. But even with bad credit ratings a feature, it can prove sound – which is good news for borrowers.

Usually, lenders have a difficult time in accepting the risks that can come with approving a large loan to applicants with low credit scores. Certainly, the perceived risk is much higher than with applicants boasting a high score. So, it can come as something of a surprise to learn that 125% home equity loans can be secured, even with bad credit a feature.

The secret to this not the actual credit score, which many people assume is the deciding factor in loan applications. Instead, securing loan approval depends on a number of other factors, and with such a large share of equity used as security, it makes sense that approval is forthcoming.

The fact is that home equity loans are considered one of the safest loans around, from the point of view of the lenders. This is mainly because property values generally increase over time, so a 125% share is almost certain to be recouped. But there is, of course, more to it than just that.

125% Loans Explained

The first question to address is how a lender can possibly be willing to approve a loan worth 125% of the security being provided. But a 125% home equity loan is different because the security is the value of property.

The reality is that homes tend to gain value over time rather than lose it – unless, of course, the economy takes a huge plunge. Generally, however, the investment is as safe as houses, as the phrase goes. So, if a property has equity worth $50,000, securing loan approval on a $62,500, 10-year loan application is very possible.

This is because the value of equity will probably have doubled by the end of the loan term. Equity is increased by the continuous repayment of a mortgage, so as the years goes by, the share of equity grows. So, the home equity loan can prove to be a great deal after just 5 or 6 years.

Considering the Credit Score

The only real risk that lenders face when approving a 125% home equity loan is that the value of the equity does not increase by 25%. Over 10 years, this is unlikely, but there are factors that can further affect the likelihood of getting approval, and the terms that any loan might have.

The credit score of the applicant is something that can have a very real influence of loan terms, for example. It is rarely enough to rule out an application, but lenders use the scores to assess whether the repayments on the loan are affordable. So, securing loan approval can be directly affected.

Improving credit scores is a good move when preparing to make an application for a home equity loan. This can generally be done by taking out small personal loans that are easy to repay, or by taking out a larger loan to consolidate existing debts. Score improvement means lower interest rates, which makes repayments more affordable.

Seek Expert Advice

Of course, nothing can replace sound advice from those in the know, especially when looking for the best deals on 125% home equity loans. The reason is that any such loan deal is going to contain conditions and terms that need to be carefully considered. So, talking to a financial advisor that can be trusted is highly recommended.

When securing loan approval on a large loan, the consequences can be severe, but when the equity tied up in a home is involved, the risk of losing that home are very real indeed.

Also, getting the best home equity loan deal can come down to making some real compromises. This is something every applicant must be prepared to face up to.

Article Tags: Home Equity Loan, Home Equity Loans, Securing Loan Approval, Home Equity, Equity Loan, Equity Loans, Securing Loan, Loan Approval

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