No equity loan

A no equity loan is known in the real estate industry as a “high loan-to-value (LTV) loan.” These are also known as 125 second mortgages, meaning that the borrower can obtain a loan putting his/her indebtedness on the house at up to 125% of the home’s value. It is a home equity loan for homeowners with no equity – a hybrid loan that is secured, but isn’t. A no equity loan is a high-risk venture for both borrower and lender, in the sense that everything has to go right in order for the loan to be repaid and the homeowner to get out of a cash-strapped situation.

No equity loans are not cheap. The interest rates on are extraordinarily high. They typically run two to six percentage points more than the rates for traditional home-equity loans – you can expect an interest rate in double digits. The fees for no equity loans are also going to be higher than for traditional loans. It is quite possible that a no equity loan will cause the mortgage insurance requirement to activate again, if it is not already present.

In the case of the 125 no equity loans, only a portion of the interest rate will be deductible. The IRS says that you can deduct interest payments on primary home debt equal to 100% of the home’s value. Any debt secured by the home beyond its value does not qualify for the tax deduction. It’s possible that your no equity loan won’t carry the tax deduction which is applied to both first and second mortgages that are secured by home equity.

A no equity loan is also going to limit your options with regard to mobility. If you take a new job in another state, you are going to have to sell a house that you will still owe money on after the sale. That means coming up with the cash balance to make the lender whole, in order to complete the transaction. People who are desperate enough to consider a no equity loan aren’t likely to have that kind of cash in the savings account.

The no equity loan is usually recourse for those people with serious cash flow problems. But defaulting on a no equity loan is different from falling behind in your credit card payments. In the case of the loan, you are in danger of losing your house. The fact that it is a “no equity” loan does not mean that the lender cannot come after the house, should you begin to miss payments.

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