Home Equity Loans for 125% of value...
Find a Conversation
| Sun, 02-26-2006 - 8:56pm |
Good or Bad?
Here is the story. When we bought this house 2.5 yrs ago, they gave us a traditional mortgage for 80% off the house and a Home Equity Line of Credit for the 20% down payment. Of course that sounded awesome at the time b/c we didnt need to put any money down, but now its a major pain. We have been paying between 250-300 dollars a month depending on what the interest rate is that month and our principal balance has gone down only $400.
In the meantime, we have about 12K in credit card bills and auto loans totaling 32K. I called around to a few places to see if I could redo the HELOC into a fixed rate loan. Everyone said that it would be easy to do. A few places, like Capital One told me that with our outstanding credit and income, they could do a 125 loan. He explained that the money would pay off the HELOC, our cars, and credit cards AND there would be like 9K left over in cash. The monthly payment would be less than what we were paying all together before. Plus there are no closing costs or anything like that.
Does this seem too good to be true? I mean, it is Capital One..they are a reputable company. I know that we would be in negative equity with our house by 25%, but that wont be an issue to deal with unless we plan on selling the house anytime soon. I guess another thing is if we for some reason can't pay, our house is at stake. I suppose that if we were that bad off that they had to foreclose, then we shouldnt be in the house anyway..I mean why be here if we can't afford it, right?
My father is pretty smart about this stuff and he thinks its worth a shot..as long as I dont rack up the credit cards or try to sell the house any time soon.
What would you do?

I would not convert the credit card debt or car debt to secured home debt.
All my best,
Danni
Just want to second what Danni said!
And I have refinanced the house to pay off debt, just to run the cc's back up again. The work of having to struggle to pay the debts off has changed our behavior and will keep us in control of our finances. And thats a bargain too me.
I think you should negotiate your cc's to the lowest rates possible. List your debts from lowest to highest amounts and start with the first one.
Shannon
What you are contemplating is one of the "Five Loans that Spell Danger" on www.bankrate.com. A high loan-to-value home equity loan is a loan secured by the equity in your home, but one that obliges you to pay more than your equity is worth. Some home equity lenders allow you to create a loan-to-value ratio of as much as 125 percent.
Bad news for you. Happy days for lenders. Getting a loan for more than your property is worth can be a gamble. Houses rarely sell for more than their fair market value. This morning the NBC national news reported the housing sales for January 2006 were down 5% from what was forecast. As interest rates continue to climb real estate becomes a buyers market (not good for those who may need to sell). The interest rates on 125 percent loans are usually higher than less-risky regular home equity loans.
Tax ramification. All of the interest paid on the loan may not be tax deductible. The amount in excess of 100% (that's 25%) is not deductible. So you lose on your taxes.
I would caution against ever taking out one of these loans. Your house is your sanctuary, your safe place, your home. To be upside down on your house is NOT good. If you are going to sink into debt and lose, then go upside down on a car, but never your house.
The last consideration is what I term wishful thinking. We seldom think about all the things that can happen: divorce, relocation, or being forced to move before there is any equity in the home.
If the worst case scenario comes to pass and you lose your home because you can't keep up the payments, you will have to pay income tax on the difference of what you owed on the home and what it sold for.
Hope this helps.
I echo what everyone else has said. It seems pretty tempting, because credit card debt can be so stressful, but owing more than your house is worth sounds very risky to me.
I'm sorry that I don't have any suggestions as to other options. It's just that if everything went kablooey and your house is foreclosed upon, you still end up owing whatever is left on the balance after the bank sells it, so it would be a one-two punch - here, you're homeless, and oh, you owe us 25% or more of the value of your home.
(Not that I think you're going to get foreclosed on. It's just that kablooey factor).
Hi and welcome to the board,
I wish I could tell you that this is a great idea and everything's going to be just fine, but I'm afraid I have to agree with the previous posters. In fact, when I read your heading, the first thing that popped into my head was, "Run, as fast as you possibly can, and don't stop for anything."
I used to work (briefly) for a company that sold insurance products as well as home equity loans. And even though the company was not the best in the world, it was good at some things. And one thing we talked often about is how we did *not* offer 125 loans because they are so so so terrible for the consumer. Basically they are viewed in the industry as a great way to lose your home. Not to mention that, if you don't manage to lose it outright, you will be STUCK in your house for a VERY long time. It takes a long, long time to bring your mortgage back down after you've sunk yourself in a hole that deep, and if anything happens (job loss, family emergency, etc.), you are, to put it politely, SOL. You can't move, you can't sell, you can't do anything but sit and suffer or declare bankruptcy and lose everything including your good credit rating.
Companies like Capitol One prey on unwary consumers, helping them dig themselves deeper and deeper holes, because that's how they make their money. They have their bottom line in mind, not your financial well being.
Okay, now, let me step off my soapbox and say that I think it's TERRIFIC that you're looking at creative ways to get a grip on your debt. It's no fun being in debt, and we all know where you're coming from. This board can be a terrific source of support, encouragement, and (when requested) advice as you embark on the often difficult, but ultimately rewarding journey toward debt freedom.
Thanks for joining us, and good luck with whatever you decide.
Blessings,
Heather
I will add my voice to the clamor of "DANGER WILL ROGER!". This is one area of borrowing that I think the experts are almost unanimously agreeing on that it is a BAD IDEA. Captital One is a well established company but I have read a lot that indicates they aren't a customer focused one and I would doubt that they are doing this in your best interest no matter how 'nice' it sounds. I would particularly like to point out the red flag that the statement about "9k cash leftover". Huh??? The 25% above the value of your home is vapor money so there is no extra 9k in vapor. They are just trying to sink you further in. Add in the fact that you are using a secured loan for unsecured debt, the tax implications of a 125 and the fact that the majority of people who do this sort of consolidation just find themselves right back in debt make this a very risky proposition. Not to mention the kablooy factor already mentioned by other posters.
So that leaves the question of what to do. It is probably time for a long hard look at the money in/money out equation in your home and time to start considering some of the hard decisions. Is it possible to sell one or more of those cars and get something more reasonable, preferably without payments? You didn't indicate what sort of income, etc. you are looking at but it sounds like you are making the payments at this point, just not making as much progress as you'd like. I encourage you to go to the library and check out a couple of books about debt management (Dave Ramsey, Susie Orman, others can recommend authors better than I) and start to learn about what other options you have available.
Hope that helps a bit. If nothing else, I implore you to wait 14-30 days and do a little reading before you move forward and at the very least, don't borrow 9k of vapor money.
Peg