High loan-to-value products raise a borrower's
debt level above the value of their home -- to
as much as 125 percent.
For example, if you have a house worth $100,000,
a first mortgage of $90,000, and a home equity
loan of $35,000, you're in debt $25,000 more than
your house is worth.
Some lenders push the envelope with 150 percent
and 165 percent LTV's, but 125 percent is the
most common. Non-bank specialty lenders have dominated
the market, but the number of FDIC-insured institutions
offering them is on the rise.
"Home equity" is actually a misnomer
for such loans. "Once you surpass your equity
worth, you're talking about unsecured debt,"
says Steve O'Connor of the Mortgage Bankers Association.
Imagine selling your home and having to pay off
the mortgage, plus come up with $25,000 at closing
to pay off the second mortgage. Also consider
that, despite what some lenders might lead you
to believe, the interest on the amount that exceeds
your home's value is NOT tax-deductible.
The risk of such loans is not the only thing
that is high. The interest rates are typically
lower than most credit cards but much higher than
the average for a regular home equity loan.
Despite its many drawbacks, the product can benefit
folks who want to consolidate high-interest debt
and plan to stay in one place a long time. One
ironic thing in the consumer's favor: since the
amount that exceeds the home's value is unsecured,
a lender cannot take assets to recoup that money.
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