They're all the rage right now -- mortgages that total up to 125% of your property's current market value. And if the lure of pulling extra equity out of your home has you looking twice, be sure to check out the facts before you take the plunge.

In fact, some home owners report that it was one decision they should have thought longer and harder about. Some agree that the reality set in when they tried to sell the home, having to bring a check to closing---rather than receive one! Others admit that the impact of over-leveraging really didn't hit home until the higher payments became tough to manage and they fell behind. While tapping 125% of your home's value doesn't have to be a negative experience, it does need to be for the right reasons.

Why are lenders making 125% loans and who's being approved for them? They're being made in the hopes that 1) appreciation will continue to increase the market value of the property; and 2) the homeowner wouldn't need to sell the house until the debt was paid down. Most lenders require that the borrowers have stellar credit. And since a strong credit picture is exactly what the borrower wants to keep, lenders feel that there's a better-than-normal chance that these loans will be repaid.

But unfortunately, it's not a perfect world. Buyers get transferred unexpectedly and have to sell. Families have financial problems and feel the crunch of higher payments.

So how could you best evaluate if a 125% loan is good for your situation? First, is your home in a stable neighborhood with above-average appreciation? If so, this will do much to help your home's value rise above the heavy debt.

Second, is it likely that you'll be able to manage payments on the new mortgage debt? If part of the leverage is in the form of an adjustable rate mortgage, make sure you know the maximum the payment could reach to and whether you could financially manage the payments if it did.

Third, is it likely that you'd keep the home (and the loan) long enough to whittle the debt down below what the property could sell for? In fact, to be truly on the safe side, you should add an estimate of sales costs to that number (since that would be paid of our your equity). And be sure to make this calculation not based on the highest price your home might bring---but on the lowest.

While a 125% mortgage might be just what the doctor ordered to fix a current financial problem, make sure you're not making yourself (and your equity) ill long-term by taking that plunge!

Published: May 5, 2000

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Julie Garton-Good, DREI “The Frugal HomeOwner™” As a syndicated newspaper columnist, author and international speaker, Julie Garton-Good DREI, C-CREC™, is called “America’s Home Affordability Expert”, addressing more than 25,000 persons annually on topics of real estate industry trends and home affordability. She is the author of five real estate books and is the sole two-time recipient of the international "Real Estate Educator of the Year" award from the Real Estate Educators Association. In 1997, The National Association of Realtors® nominated Julie as one of the fifty most influential people in the real estate industry. She shared the list with only three other women.