100 Home Equity Loan

100% Equity Home Loan Education

You've probably heard about home equity loans, but what about a 100 percent home equity loan?

It's one way to free up resources from your home. Another way is to simply refinance your current mortgage. Either route you choose, you may be able to tap into the equity that you've accumulated.

How A 100 Percent Home Equity Loan Works

To begin, all lenders establish a maximum loan-to-value (LTV) ratio (i.e. all outstanding loan amounts divided by the home's appraised value). For example, a lender that establishes a maximum LTV of 80 percent would allow $80,000 to be borrowed if the appraised home value is $100,000 (80,000/100,00 = 80% LTV).

With a 100 percent home equity loan, you actually borrow 100 percent of your home's value (e.g. $100,000/$100,000 = 100% LTV).

Under the above example with $80,000 in existing loan amounts, the borrower could access $20,000 of equity; the difference between the appraised home value and the amount of the outstanding loans.

Simply stated, a 100 percent home equity loan means you open an additional loan or line of credit accessing your home's equity. The home equity loan or credit line combined with your current mortgage balance totals 100 percent of your home's value, and you end up with more than one loan.

For example, if your home's value totals $100,000 and your loan balances equal $80,000, you could open a $20,000 home equity loan or line of credit. See Chart 1

100 Percent Mortgage Refinance

While the difference is subtle, a mortgage refinance works a little differently.You still access the equity in your home, but you're getting to it in a slightly different way. With a refinance, you replace your existing loan with a new loan and ask for an additional amount (equal to the equity value) which is added to the new loan. With a refinance equal to 100 percent of the home's value, you end up with one loan instead of multiple loans.

For example,shows let's say Jackie and Robert want to update their kitchen. They decide to refinance their current mortgage and access some equity to help cover the costs. See Chart 2

First, they need to consider how much they still owe on their current home loan. Their current mortgage balance is $80,000, and an appraisal values their home at $100,000. They could refinance 100 percent of their home's value and use what's left ($20,000) to help with remodeling costs.

Learn more about the basics of mortgage lending.

Should You Access Your Home's Value?

There isn't a right or wrong answer. However, borrowing 100 percent of your home's value may offer you greater benefits than other options.

A 100 percent home equity loan or 100 percent mortgage refinance may provide:

• Larger Amount Of Credit

  Borrowing 100 percent of your home's value may mean access to more funds than from another source (i.e. credit card).

• Lower Rates

  Typically, loans secured by a home have lower interest rates than credit cards or other unsecured personal loans.

• Tax Deductibility¹

  Generally, the interest on a home equity loan may be tax deductible; whereas, there may be no tax benefits for most personal loans.

Home Equity Loan Options Above 100 Percent

Some lenders allow homeowners to borrow more than the value of their home…more than 100 percent LTV.

There are some lenders that offer 125 percent home equity loan products. That allows borrowers to access 25 percent more than their home's appraised value.

While a 125 percent home equity loan works similarly to a 100 percent home equity loan, there are a few considerations.

125 Percent Home Equity Loan Advantages

• You can use a 125 percent home equity loan to consolidate high interest rate credit cards or other loans.
• A 125 percent home equity loan offers the borrower another refinancing option.
• A 125 percent home equity loan offers the borrower more likelihood for cash out if the first mortgage balance is high.

125 Percent Home Equity Loan Risks

• Higher LTV ratios often mean higher interest rates for the borrower.
• Higher interest rates could translate into a hefty monthly house payment.
• IRS regulations won't allow a tax deduction on any part of a home equity loan that exceeds the home's fair market value (100 percent).
• If you plan to sell your house, you may have to come up with more money at closing because you have borrowed more than your home is worth. In other words, if you don't sell your home for more than 125 percent of its value, the equity you may have used for a down payment on a new home could be tapped out.
• Some lenders won't offer 125 percent home equity loans as a second mortgage.

Using Your Home Equity Wisely

Experts don't recommend tapping into your home equity for just anything. However, if you choose to access 100 percent of your home's equity, there are many ways you could use the available funds: making home improvements, consolidating other higher-interest rate credit accounts to simplify monthly finances, purchasing big-ticket items or clearing up medical expenses, for example.

Even though home equity loans can carry lower interest rates than unsecured credit, there is still some risk. Defaulting on any home loan, including a 100 percent home equity loan or 100 percent mortgage refinance, could mean losing your house.

Keeping that in mind, there are times when using 100 percent of your home's equity or home's value may be the right decision for you.