Are Cash-Back
Loans A Good Deal?

Question: We've found a great deal. We can buy a home that we can learn to live with and the amazing part is that we can get a mortgage for more than its value -- a 125% loan. This will allow us to move in and get cash back. Is this really too good to be true?

-- Tony, Los Angeles

Answer: It is . . . and it isn't. Yes, you can get 125% of value mortgages. The question is, do you really want one? Keep in mind that with this type of loan you will owe more than the home's value. True, over time with a healthy market, price appreciation will raise the value of the home to more than cover the mortgage. However, if you have to sell soon (as in the case of a change of job, an illness or a financial emergency), you'll find yourself "upside down." You'll owe more than your house is worth. In that case to protect your credit, you might have to come up with cash to pay off the mortgage in order to sell.

There are two other problems with 125% mortgages that sometimes aren't clear to borrowers. The first is your tax liability. Most people plan on deducting the interest on their mortgage from their income taxes. However, that only applies if a home is collateral for the loan (subject to certain maximum limits). With a 125% mortgage, a portion may actually be a personal loan. As such, this interest on that portion (or perhaps all, depending on how the IRS sees it) of the loan may not be deductible.

Second, the interest rate on the 125% mortgages tends to be high, sometimes as much as three percent or more above market. Do you really want to pay that much more interest?

You are better off with one of the no-down or almost no-down fully-collateralized mortgages that are available today. Check with a good mortgage broker.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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