Because home equity loans are based on equity, it only makes sense for borrowers to apply for such a loan if their property has sufficient equity. However, equity is no longer a prerequisite for a home equity loan. Instead, homeowners can take advantage of 125% equity loans. These loans allow homeowners to borrow up to 125% of their home's value regardless of whether there is little or no equity.

While these loans have certain perks, there are also extremely dangerous. Furthermore, lenders take a huge risk. With this said, mortgage lenders establish specific requirements before approving a 125% equity loan. Decisions are primarily based on credit history and income. If a homeowner has demonstrated an excellent payment history with their current mortgage and other credit accounts, and has a high FICO score, the lender is more inclined to approve the loan request. Persons with good payment histories rarely risk a bad credit rating. Therefore, they are less likely to default on the loan. Nonetheless, a borrower's income is also a factor. If the borrower has other debts, they may be unable to afford an additional expense. Moreover, homeowners applying for a 125% equity loan may not qualify for the full amount.

A 125% home equity loan is useful for a variety of reasons. Excessive debts make it impossible for many people to get ahead. This is mainly due to high finance fees. If choosing an equity loan up to 125%, homeowners are able to consolidate debts at a much lower interest rate. Because 125% equity loans have higher defaults, the interest rate on these loans is higher than standard home equity loans. Still, if using the loan to payoff or consolidate debts, the rate is lower than most credit cards.

A 125% equity loan could also be beneficial when purchasing a new home. If the home needs extensive repairs or upgrades, a 125% equity loan can provide the extra cash for the project. This option is great for investors buying fixer-uppers below market price.

The danger of 125% equity loans is obvious. For this reason, many people avoid such loans. If home values continue to appreciate, the property's value will rise and eventually gain equity. If the market stalls or home prices decrease, it will take years to break-even. Furthermore, selling the property would be impossible because the amount owed exceeds its worth.