In the midst of a mortgage market change, there has arisen a very popular mortgage product: the over-equity mortgage. Many aggressive lenders today will actually allow you to access more than your home’s value with a second mortgage, often up to 125% of your value to be precise. Although this sounds like an attractive way to access some needed cash, here are three reasons that might cause you to reconsider:
1. Very High Interest Rates
Lenders take a great risk in lending you more than your home’s value, therefore, even with excellent credit, you will usually receive an interest rate in the low teens. With high credit, you should have the option of a lower-rate, unsecured loan, depending on the amount of money you need. Be sure to consider all options before going this route.
2. Debt Consolidating Without Changing Your Habits
This can be a good alternative for consolidating debt; however, most people do not change. Therefore, if you use this alternative to pay off high-interest credit card debt, and then continue to use your credit cards, you could be setting yourself up for financial disaster.
3. Your Home Will Be At Great Risk
By borrowing over your equity, you place your home at heightened risk of foreclosure. You will have fewer options available to save you from strained finances in the future. You will likely not be able to refinance again anytime soon, and selling your home will be harder to do when you owe more than it is worth.
While this can be a smart financial move, you will want to consider these things before obligating yourself to an over-equity mortgage. Make sure to weigh the risk you are taking against the long-term benefits you are expecting.