An over equity loan is pretty much exactly what it sounds like: it is a
home
equity loan (or line of credit) that is for more than the equity you
actually have in your home.
How It Works
An over equity loan is a
combination of your equity and a percentage of your home's total value. For
instance, assume that you have a home that is worth $200,000. Over the years,
you have paid off $75,000 worth of your principal, which is now yours in equity.
A traditional home equity loan would allow you to take out that money as cash,
but an over equity loan allows you to borrow more. If you were to get a 125%
home equity loan or line of credit, you would be borrowing $125,000 (your equity
[$75,000] + 25% of your home's value [$50,000]).
The basic
requirement of this loan is that you have excellent credit. They are given out
under the assumption that your home's worth will increase over the years and
that you will be able to make the payments. You, the borrower, should be very
confident of this as well, seeing as you will need to sell your home for this
much if you decide to move.
What You Need to Know
The 125% over equity loan is the most
common, though there are 150% ones, too. Some states do not allow these loans at
all, so you'll need to see what options are available to you. Some other
important points include:
- The loan-to-value ratio in these cases is much higher than traditional
equity loans. This means the interest rates for these loans are much higher than
for others.
- The IRS does not allow tax deductions on the over equity part of these
loans.
- Again, remember that you will need to resell your home for 125% of its
current appraised value if you want to pay this loan off at any time. Most, if
not all, of the profit you hoped to gain from selling your home will probably be
tied up in this new loan.
Beware: you are putting yourself
considerably further into debt and more dependent on the housing market by
taking out one of these loans. However, if you need the money to consolidate
your credit card debt, do some remodeling, or take care of other higher-interest
debt you currently have, an over equity loan might be your answer.