The 125% Mortgage: the Right Mortgage Refinancing Choice?

By Gil Mackey
Mortgage Credit Problems Columnist

You have many choices when it comes to mortgage refinancing, but what do you do if you need to borrow more than what your home is worth? If you don't have enough equity in your home, the 125% mortgage could be the answer.

Mortgage Refinancing

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When it comes to mortgage refinancing there are three things you must remember:

  • Clearly define your goals for refinancing
  • Shop around with four or five lenders to find the best deal
  • And make sure your refinancing choice fits with both your short- and long-term financial situation

Let's say your refinancing goal is to pay off credit card debt, but you don't have enough equity to cover how much you need to borrow. This is where the 125% mortgage comes into play. This is a mortgage refinancing option that allows you to borrow more than your home is worth, and may help you significantly reduce your monthly payments on all your debts and lower the overall interest your are paying. Closing costs can also be rolled into the loan, allowing you to refinance with no out-of-pocket costs.

The 125% Mortgage

Pay attention as you take a closer look at the 125% mortgage. Like many mortgage refinancing choices you may have, it has its pros and cons. It may take a long time to build equity up again in your home. You are also taking unsecured debt (which could probably be discharged by a bankruptcy if necessary) and securing it with your home (which could place you at risk of foreclosure if you can't make the payments). For many, however, a 125% loan can be a financial lifesaver. Check with a financial or accounting professional about potential tax savings and other considerations.

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