Perhaps this is you. Or maybe you are considering a no-equity home loan due to some unforeseen expenses, or you want to fund a remodeling project.  There are times this is a smart choice, especially if it is to improve your existing home for sake of increasing the overall home values. 

However, more often than not, people make the mistake of  taking the no-equity loans out and exceeding the value of their home in that loan.  Then they become trapped by high interest rates, or even the possibility of losing their home if they cannot accurately repay the no-equity loan. These loans are often referred to as high loan-to-value (LTC) equity loans in which you can borrow as much as 25% above your home’s value. They in turn can sometimes backfire, creating additional debt for the borrower.

In the late 1990’s lenders aggressively began the popularity of these loans for cash-strapped homeowners, making these loans a good option for assuming more debt while using the money to cover other debt in their life. Rising home values and solid mortgage refinancing options have sealed the no-equity loan further.  When approached properly, they can be relief for some.  But for others, the downside is frightening. The interest rates are high, usually running as much as six percentage points above traditional home-equity loans.

A lot of this is pendant on your lender, credit history and overall construction of the loan. If the no-equity loan is applied on top of your mortgage, then the high interest rate only applies to the new loan.  However, if you have your initial mortgage refinanced to include the new loan, then the interest rate is applicable for the whole amount, including the first mortgage.

What is a red flag again, is if you have to sell your home and the value is considerably less than your loan and then during the selling process all of a sudden you have to come up with that extra cash to pay off the loan or be looking at a default, possible bankruptcy.  So before you get pulled in with the lure of easy money, consider all other possible options first.  Look at a traditional unsecured personal loan which will not be directly tied into your home’s future outlook. 

If a no-equity home loan is still looking promising, opt to borrow as little as you can, look for a structured deal with a lower interest rate and trust the process to a professional who has your best interests in mind.