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My first post, so here goes...I have an outstanding 401k loan (4 yrs left to go). I am contemplating getting one of those 125% LTV 2nd mortgage loans and wrapping some credit card debt and the 401k loan into it.

I am paying (myself) 9.75% on the 401k loan. The 2nd mortgage interest rate will be 12.5% fixed for up to 30 years (my choice).

Does this make sense? By putting the 401k loan money back into my plan, I could potentially earn more than the 12.5% I would be paying on it and my takehome pay will increase now that the loan would be paid.

Taking out the 125% LTV loan will save me close to $400 per month and leave me cash in the bank...excluding whatever tax benefits there will be.

Thanks...jimmi mack
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I am contemplating getting one of those 125% LTV 2nd mortgage loans and wrapping some credit card debt and the 401k loan into it.

I am paying (myself) 9.75% on the 401k loan. The 2nd mortgage interest rate will be 12.5% fixed for up to 30 years (my choice).

Does this make sense? By putting the 401k loan money back into my plan, I could potentially earn more than the 12.5% I would be paying on it and my takehome pay will increase now that the loan would be paid.


There is something for which you may not have considered.

You will NEED to stay in your home for a very long time.

These types of loans have become a topic of concern for the bankers. You will be in debt far above the value of your assests.
A friend of ine is a mortgage broker and he has many times told couples that they cannot sell thier house because they have one of these loans and no one will give them another because of the asset - liability ratio. If home prices stay flat or even go down you may have some serious problems. If you loose your job or can pay back the loan you wil loose your home.

The loan may 'save' you money short term but it will not do you any favors for your balance sheet.

Also you will be putting unsecured debt (cc) on your home.

Personally, I would advise against this. At the least I would talk to a different mortage banker and get thier opinion and work the number from a balence sheet perspective vs a cash flow one.


john
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Hi Jimmi!

I think it's a very UNFoolish idea. That 125% loan is the worst thing that was ever designed, imo. You're talking about risking not only your home, but much more beyond that amount.

It's a very smart thing to be paying back on your retirement loan, but to borrow more (and heavily, at that) to pay off borrowed money just doesn't make sense.

Also, there's no way you can figure what you'd "potentially" earn on your investments, as there's no way to guess what the market will do in the short term (or long term, for that matter). On top of this, I just can't see the justification for wanting to take a 30 year loan, when you've got only 4 years left on what you owe now.

Why in the world would you take out a loan you'll be paying for 30 years if you don't have to? Have you figured out exactly how much you'll have paid by the end of that time? Ouch!

My suggestion would be to shorten the 4 years left on that loan by adding more to your monthly payment each month--send in as much as you can, and then be done with it.

I don't think there's ever a good reason for taking out a 125% loan. Ever.

Good luck!

Tony
...but I still am...

Off2Aruba
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Here's another reason why 125% loans are a bad idea. While you can deduct interest on mortgage loans up to 100% of the fair market value, anything above that is personal interest and is not deductible.

Naturally, as with anything involving taxes, it's more complicated than that, but that's the gist of it.
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Tony wrote:

I don't think there's ever a good reason for taking out a 125% loan. Ever.

Amen. I'm a full-time Realtor and I could tell you horror stories of people who call me and have to sell their house for some reason (job transfer, divorce, bad health, and on and on) who CAN NOT sell their house because they have negative equity on it.

That means they would have to bring money to the closing.

The reason most got in that situation in the first place is that they were way over their heads in debt.

IMHO, an ideal goal is to have less than 70% financing on your home. Difficult, for many people, but a prudent goal nonetheless.

Susan
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Here's another reason why 125% loans are a bad idea. While you can deduct interest on mortgage loans up to 100% of the fair market value, anything
above that is personal interest and is not deductible.


Absolutely! You're taking a 9% loan that has the most favorable tax treatement of any commonly available loan and converting it to a loan that does not have any favorable tax treatment, an on top of that you're paying a higher interest rate. And you'll have to pay PMI (private mortage insurance) plus loan fees in order to do so.

If you absolutely positively have to take out a 125% loan (and the justification should be something like a medical emergency, not shifting debt from one place to another), be extremely careful. The companies that do 125% loans have a tendancy to tack high fees onto the loans. I'm sure there are some reputable ones out there, but be very very careful.

-Michael
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Amen. I'm a full-time Realtor and I could tell you horror stories of people who call me and have to sell their house for some reason (job transfer, divorce, bad health, and on and on) who CAN NOT sell their house because they have negative equity on it.

That means they would have to bring money to the closing.

The reason most got in that situation in the first place is that they were way over their heads in debt.

IMHO, an ideal goal is to have less than 70% financing on your home. Difficult, for many people, but a prudent goal nonetheless.


Thanks for voicing up here, Susan!

Folks, if you ever even entertained the idea of taking out a 125% loan, do your homework. Look to people like Susan who work in the industry--these people are the experts.

Tony
...but I still am...

Off2Aruba
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My first post, so here goes...I have an outstanding 401k loan (4 yrs left to go). I am contemplating getting one of those 125% LTV 2nd mortgage loans and wrapping some credit card debt and the 401k loan into it.


You didn't tell why you took the 401K loan so my imgination is running wild.

Why did you take out he 401K loan? Was it to pay credit cards that you have now run up again? If so, what will keep you from running them up again? Why have the $400. in the bank when you will be paying 30 years for the dinner, shoes or whatever you charges last week? Have you given any thought as to how much those items will cost you over that many years?

I wouldn't do it. Stop using your credit cards! Start today and keep track of where you are spending your money and then make cuts where you can and then use the extra money to pay off the credit cards and then pay off the 401K loan early.

Utahtea
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Tony,

I agree with you that the 125% loan is a bad idea. The rate that this bank is charging is higher than some credit cards. (7.9-9.9%)

Although home improvement loans are tax deductible, I was under the impression that one had to actually 'improve their house' to qualify for the deduction.

As you pointed out too, four years vs. thirty is a big difference.

Also, once one does a 125% loan, where else can they turn to if they find their funds have dwindled? Don't tell me - are 150% loans around the corner, available for 18% APR?

- Lan
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"Although home improvement loans are tax deductible, I was under the impression that one had to actually 'improve their house' to qualify for the deduction."

I believe that 2nds are tax deductible up to the appraised value of the house. (i.e. the last 25% of a 125% LTV would not be tax deductible) I do not believe that it is strictly limited to that portion actually spent on 'home improvement'. You might check out the IRS web site, or look through any tax preparation software you might have used last year, or cruise through TMF's tax discussion board.

Tom
Kaigun Chusa
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Also, once one does a 125% loan, where else can they turn to if they find their funds have dwindled? Don't tell me - are 150% loans around the corner, available for 18% APR?

Oy! Lan, bite your tongue! LOL!

You know, this sort of thing really gets me, the way lenders do everything in their power to make borrowing seem like the easy answer to everything.

The commercials on TV--they're so misleading. "When your bank says no, Champion says YES!" Arrrgh! Yeah, Champion says "yes" because what do they care? You have credit problems? We'll give you all the cash you want.

Translation: You don't pay, we take your house.

These lenders come off making it sound so tempting. If I had tons of bills, and someone tells me they can save me 2,3,4 hundred a month, why wouldn't I jump at the chance. How about a clear, well stated addition to the commercial that lists the pitfalls, risks and dangers? Think that'll happen? Noooooooooo!

Sorry for the rant!

Tony
...but I still am...

Off2Aruba
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The commercials on TV--they're so misleading. "When your bank says no, Champion says YES!" Arrrgh! Yeah, Champion says "yes" because what do they care? You have credit problems? We'll give you all the cash you want.

Translation: You don't pay, we take your house.

These lenders come off making it sound so tempting. If I had tons of bills, and someone tells me they can save me 2,3,4 hundred a month, why wouldn't I jump at the chance. How about a clear, well stated addition to the commercial that lists the pitfalls, risks and dangers? Think that'll happen? Noooooooooo!

Sorry for the rant!


Tony,

You rant all you want, I am behind you 100%

The commercial that really burns me is the one that Bob Villa does for these kinds of home loans!

Utahtea
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Thank You, Tony, for your feedback...

jimmi_mack
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The commercials on TV--they're so misleading. "When your bank says no, Champion says YES!" Arrrgh! Yeah, Champion says "yes" because what do they care? You have credit problems? We'll give you all the cash you want.

I don't know if it'll make you feel much better, Tony, but a couple of months ago First Union closed 'The Money Store' operations. They were right there along with Champion Mortgage for a while there.

- Lan
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I don't know if it'll make you feel much better, Tony, but a couple of months ago First Union closed 'The Money Store' operations. They were right there along with Champion Mortgage for a while there.


Thanks, Lan! That is good to know. Now if we can do something about Champion.

Don't get me wrong, I'm sure it's a fine company, and fulfills the needs of many people. But it's the marketing that I take issue with. They make it seem like there's a simple "out" and that's never the case. I've no doubt that there are many who found themselves losing their homes because they're spending habits never changed.

Just once I'd like to see an honest commercial when it comes to borrowing money.

Tony
...but I still am...

Off2Aruba
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Compare your total cost of paying back the proposed 125% 2nd Mortgage consolidation loan with the total cost of paying back the 401k loan and credit card debt.
I think you will find the math favors not doing the 2nd from a total cost standpoint, even factoring in the tax advantages.

The $400 a month increase in your take home is insignificant compared to the cost of the 2nd. Most of the time, people spend the increase and wind up back where they were before, but now they have the 2nd also.

Bite the bullet and pay your credit card debt out of current cash flow first---then the 401k. Then your salary increase will be real and you'll save a bunch of money over the long haul. You'll be glad you did if your investment objective is equity---not debt.

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the 125% loans are con jobs by the lending institutions. These loans trap you into the house for an indefinate period of time. By taking this type of loan, you are gambling that the value of your house will raise to meet the 125%. that may or may not happen. Your best bet is to go on a budget. Get your finances under control and get out of debt. Burn that credit card and do not get another one until you have gained control of your life. The credit card companies enjoy hooking people for life with addiction to plastic.

good luck
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I thoroughly agree with all of the previous posts: Taking out a 125% loan is never a good idea. Consumer Reports made that very point a few months back, in an article that defined the difference between "good debt" (tax-deductible debt, debt on important major purchases, debt on appreciating assets) and "bad debt."

And I agree wholeheartedly that a lifestyle change is the key. That is the reason why so-called "consolidation loans" are frequently a bad idea: If one is still governed by out-of-control spending habits, the miscellaneous debts will soon begin to reappear; it will be just as before--except for the addition of the mega-loan that was supposed to make everything easier.
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I am a mortgage broker. I am constantly talking to people about 125% loans. I almost invariably urge my clients NOT to take a 125. My reasoning has been explained in many of the posts already. First, it makes little sense to encumber your home with consumer debt. Second, your 401K loan is a secured borrowing that can be simply extinguished by relinquishing the asset. Third, if the housing market takes a downturn you will be in trouble. Fourth, if you try to sell your home you may also be in trouble. The tax benefit from taking a 125 does not pay for these risks. You will "kick" yourself four years from now (when you would have the 401K loan paid-off). Please don't do it.

JS
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Wait a minute Tony. I disagree. Jimmi needs to get rid of his debt as quickly as possible. There are circumstances though. If he plans on staying in his present home for the next 15 to 20 years, a 125% loan could be a good option, and depending on credit risk, may be one of the few options. Paying roughly 20% on credit cards is very Unfoolish if you can get a simple, fixed rate loan of 12% to cover it. It could be the difference in paying off the debt in 20 years or 10.

JimG707
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JimG707...some info for you...

I never plan on selling my home...I will retire in it!

I have $14K on a 2.9% Visa card til' November 2000.

My FICO score is 700+...thus, I am an excellent credit risk.

Thanks for your response...jimmi mack
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Wait a minute Tony. I disagree. Jimmi needs to get rid of his debt as quickly as possible. There are circumstances though. If he plans on staying in his present home for the next 15 to 20 years, a 125% loan could be a good option, and depending on credit risk, may be one of the few options. Paying roughly 20% on credit cards is very Unfoolish if you can get a simple, fixed rate loan of 12% to cover it. It could be the difference in paying off the debt in 20 years or 10.

Hi Jim!

I'm glad we can agree to disagree. ;)

I don't see it your way. Jimmi would be putting his home at risk, trading secured debt for unsecured debt. Now I'm far from a math guru, but 15 to 20 years at 12% is going to be far more costly to him than a few years paying off those CC's at 20%.

I still don't see that there's ever a time when such a loan would benefit a borrower.

Tony
...but I still am...

Off2Aruba
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Hopefully Tony will see this also. This was my experience. I had a student loan with 20 years left on it for $13K. I had accumulated very unfoolish (am a new fool) credit card debt of about $18K with rates ranging from 15.99% APR to 21.99% APR. Tried for a few years to shift debt from card to card through special low percentage rate offers but basically the $18K debt was still there. I also plan to be in my home forever. Using Money2000 debt reduction planner, I found that at my current rate(s) I would pay for 27 years and would have paid nearly $80K in interest, all debt combined. I was paying over $600 per month on this debt (which was seriously straining finances). I took a $40K 125% loan @12.99% simple fixed rate. Monthly payments were lowered from $600 to $400. The Loan will be paid off in 15 years, and I will only pay $42K in interest. So you tell me if I made a mistake. It may not have been the greatest decision in the world, but it sure eased the stress on my finances. I even saved $1.40/month in postage because I only pay one bill. I fail to see the down-side in my situation. Hope this is helpful. JimG707
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JimG707 wrote:

I also plan to be in my home forever.

Using Money2000 debt reduction planner, I found that at my current rate(s) I would pay for 27 years and would have paid nearly $80K in interest, all debt combined. I was paying over $600 per month on this debt (which was seriously straining finances). I took a $40K 125% loan @12.99% simple fixed rate. Monthly payments were lowered from $600 to $400. The Loan will be paid off in 15 years, and I will only pay $42K in interest. So you tell me if I made a mistake. It may not have been the greatest decision in the world, but it sure eased the stress on my finances. I even saved $1.40/month in postage because I only pay one bill. I fail to see the down-side in my situation. JimG707


IF you do stay in your home forever and IF the value of your home continues to appreciate and IF you continue to pay down the debt,

then yes, it can work.

I've just seen too many people end up having to sell their house for one reason or another and not having the cash to pay the difference between the sales price and what they owe on the mortgage.

Susan
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Hopefully Tony will see this also. This was my experience. I had a student loan with 20 years left on it for $13K. I had accumulated very unfoolish (am a new fool) credit card debt of about $18K with rates ranging from 15.99% APR to 21.99% APR. Tried for a few years to shift debt from card to card through special low percentage rate offers but basically the $18K debt was still there. I also plan to be in my home forever. Using Money2000 debt reduction planner, I found that at my current rate(s) I would pay for 27 years and would have paid nearly $80K in interest, all debt combined. I was paying over $600 per month on this debt (which was seriously straining finances). I took a $40K 125% loan @12.99% simple fixed rate. Monthly payments were lowered from $600 to $400. The Loan will be paid off in 15 years, and I will only pay $42K in interest. So you tell me if I made a mistake. It may not have been the greatest decision in the world, but it sure eased the stress on my finances. I even saved $1.40/month in postage because I only pay one bill. I fail to see the down-side in my situation. Hope this is helpful.

Hi Jim!

I think it's great that this worked for you, I really do. And to be clear, I hope that you don't feel like you have to justify to anyone about taking this loan. You've shown that for you, this was the right move, and I'd never argue with that.

My point was simply that it's certainly not the answer for everyone, and could well have the potential for disaster for many who are looking for a quick fix.

There's no right answer to every situation that would apply to everyone. Each person's situation is different. There are many people who don't do their homework and research as you have done, people who are deep in debt and become vulnerable to what sounds like the panacea to their situation.

Your point though, is that it's important that we aren't too quick to discount all considerations. What we may jump on as being absolutely wrong, may possibly be the right answer for some.

Tony
...but I still am...

Off2Aruba
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AS A MORTGAGE BROKER... WHAT A BONANZA... LET ME WRITE THE LOAN AND IT'S PARTY TIME!!!!
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