The catch is that you are paying interest on a loan in anticipation that the actual property increases in value. By the time the property value catches up with the loan amount, you will have already paid enough interest to pad their bottom line. In short, its their way of making a few extra bucks. But understand that its win-win for both sides because the homeowner uses that money to increase the value of his property and after having it re-appraised he will have more equity in a shorter time period.

The previous answer is true only to a point. The catch is that this appreciation doesn't always come. In that case you can end up owing more on the property than you could sell it for, making enormous payments. The catch is that you could be strongly tempted to spend this apparent windfall on something other than increasing the property's value. This is a speculative investment. And with any other speculative investing, you better know the market really well, know where in the price cycle this property is, know if there's a bubble about to burst, know what factors you can control and what you can't, know a REALLY good fortune teller.

The catch is that you might not be able to sell or refinance your way out of the loan. When the 125% home equity loan was first introduced, I heard hundreds of underwriters across the country gasp in shock. At that time it was pretty rare to even see 100% financing. You are definately betting that the value of your home will increase a great deal in a short time. Home equity loans are priced according to FICO score and Loan to Value (lower is better) so the 125% loan is the highest priced equity loan available. Combine that fact with the knowledge that equity loans are prime plus a percentage and even if rates are low now, and the percentage add-on never changes - Prime will go up ! Your payments will increase for sure and you need to be prepared to make those payments. When you find that the higher payments are not worth what you received in return, you will then find out that the realtors are quoting you approximately 10% in "costs" to sell your home. If it hasn't appreciated enough to cover the amount you owe plus the costs of selling, you are "upside down". That is a pretty common term in the car industry, but in the housing market it means you could be homeless or back living with your family. The 107% loan is probably a version of an affordable housing program, which allows you to borrow 100% of the sales price, plus some closing costs and possibly a Mortgage Insurance premium. The underwriting guidelines are going to be stretched a little to allow maximum use of the program, but you are going to have to show you understand how to use credit.