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Over Equity Loans

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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.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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