A mortgage is a loan that is secured by your house. It only makes sense then, that the value of your loan can't exceed the value of your house -- but this is not always the case. There are situations when you can borrow more than the value of your home, though this is not always advisable.
Mortgages Over 100 Percent
In the late 1990s, lenders began offering mortgages for up to 125 percent of a home's value. These loans are considered mortgages, but according to Chris Larsen, chief executive of E-Loan, "even though it's a real estate loan, it really should be seen as a personal loan." This is because with 25 percent of the loan being unsecured, lenders charge higher interest rates than they would for a typical mortgage covering the value of the home.
In some instances, your mortgage may initially be equal to -- or even less than -- the value of your house, only to have the house value sink below it -- a condition known as being "underwater." Although a lender may not offer you a loan for more than the value of your home, there is little that they can do if the house decreases in value. In 2009, the Federal Housing Finance Agency responded to this problem by offering refinancing plans for loans worth up to 125 percent of the value of the home.
Second mortgages are loans taken out on the equity that you own in your house -- that is, how much you have paid off on your first mortgage. So if you have paid off $50,000 on your mortgage, you would have $50,000 in equity to borrow against. Most lenders will give you a second mortgage that creates a loan-to-value ratio of 85 percent between both mortgages. In most states other than Texas and West Virginia however, you can likely find lenders that will extend the total of your loans to 125 percent of your home's value.
It can be tempting to borrow as much as you can against your home, but it can become dangerous when your secured loans are worth more than 100 percent of your home's value. This creates a large burden to overcome when paying off your mortgage and can result in significantly higher interest rates. Most important, increasing the amount of your mortgage beyond 100 percent of the home's value increases the risk that you may lose your home.
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