There are many reasons why someone would want a 125% home equity loan. Moving into a new home doesn’t mean that we only have to buy the home. Many people also want to buy new furniture or need to renovate their new home.

Other borrowers need to consolidate other forms of debt and for paying one single bill at the end of the month. It is important to consolidate your bills into one big bill because it is not only easier to pay, but it is normally also cheaper. It is easier to pay just one bill and it is easier to negotiate with just one lender if there is a need to renegotiate the loan.

The interest rate applied on 125% home equity loan is lower than the rate of credit cards or other forms of consumer credit. This is due to the fact that the loan is partially secured by the underlying real estate property. Since the loan isn’t completely covered by the asset (that means, your home), its interest rate is higher than of a first mortgage that only covers perhaps 80% or 90%.

It must be noted that a 125% home equity loan doesn’t mean that you have to take a mortgage in the value of 125% of your home. It only means that it can reach 125%. For example, if your home is appraised at a value of $100,000 and you get a first mortgage of 80% on your home, that means that you still can get a 125% home equity loan on your property. That makes 45%, or $45,000.

If you are applying for a first mortgage, you’ll be able and willing to get the best market rate for the first chunk of 80% and a relatively worse interested rate for the following 45%.

Do the math and do not borrow more than you need. Substitute high interest debt for long term interest debt. Watch out for any possible narrow paths on your finance to avoid defaulting on your lenders. That will only make your credit score go down at the same time that the interest rate goes up.

In other words, a 125% home equity loan is just a normal mortgage on your home or a line of credit over your home’s equity, if you have accumulated some. The home equity loan and credit line combined with your mortgage covers more than 100 percent of the home’s worth. It is similar to having more than one loan, a mortgage that is securitized by 80% or 90% or your home and a loan without collateral of 45% or 35% or your home’s value. You simply can see it as having two loans.

While the difference is minimal for you, a mortgage refinance would mean something completely different to you. You also access the equity of your home in this deal, but in a slightly different way. With a refinance, the borrower replaces the existing loan with another loan. The lender also asks for an additional amount. This value is added to the new loan.  A refinance means that you can get much worse conditions than you had with your first mortgage. Applying for a 125% loan means that your second mortgage is separate from your first mortgage.

125% home equity loans are normally used for bill consolidation, home improvements, paying for college tuition, buying of a new car as business startup capital, medical emergencies, or any other essential bill that cannot wait.

Bill consolidation by using a mortgage loan of 125% can be a way of saving on the interest paid. Most debt, like credit card debt, has high interest rates. The interest rate is also variable and having credit card debt is a negative point for your credit score.

The value of loan amount against real estate property sanctioned by most lenders varies from the standard 80% to 125% of the home appraisal value. Only specific lenders offer loan amounts above the value of the home. You’ll have to invest some time to find these.

Equity loans, no matter if they are at 125% or only 80% can be open or closed ended. Open end home equity loans are actually a revolving credit line. It is normally called home equity line of credit. It provides the borrowers the options of when to borrow against the equity in the property. The lender sets the limit to the credit line. The period of the loan can be from a couple of years up to 30 years.