No Equity Loan

A no equity loan is a high loan-to-value (LTV) home equity loan, where the amount borrowed exceeds the home’s value. In cases where a buyer has just recently purchased a home and has no equity yet, home loans are still available with this type of loan product. Often, a loan can be had for up to 25 percent above the value of the home.

It’s almost unheard of for a first mortgage to amount to 125 percent of a home’s value, but second mortgage lenders are more willing to issue loans against property for which the owner has no equity. This is actually a sort of hybrid loan, since it is both secured in a way, and unsecured in a way. It is secured because the lender has a second position on the property, but it is unsecured, since in the event of default, the holder of the first position would take all the benefit and leave nothing for the lender in second position. The interest rate for a no equity loan will be substantially higher, because the risk is greater. Fees for a no equity loan are also often higher than for a first mortgage loan.

Be aware that you may not be able to deduct the interest on the no equity loan, since you may not deduct interest expense for the loan amount that exceeds the home’s value. A drawback of the no equity loan is that it makes it impossible to sell the home without coming up with additional cash to pay off both the primary note and the secondary no equity note.

Often these types of loans are targeted at the subprime market, and at individuals who are strapped for cash. While there may be some circumstances where a no equity loan may be advantageous, first consider alternatives such as trying to qualify for an unsecured personal loan.