125% Loan

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125% Loan

A 125% loan is a leveraged mortgage that lets a homeowner borrow up to 125% of a property’s appraised value. For example, on a $300,000 home a 125% loan would provide up to $375,000.

How it works

  • Loan-to-value (LTV): A 125% loan has an LTV of 125% (loan amount ÷ appraised value). Lenders use LTV to assess default risk; higher LTV means greater risk.
  • Pricing and terms: Because of the added risk, lenders charge higher interest rates and may add fees. Risk-based pricing can make rates substantially higher than on conventional mortgages (sometimes much higher).
  • Collateral and loss exposure: If a borrower defaults and the property is sold, the lender is unlikely to recover the full balance when the loan exceeds property value.

Common uses

  • Cash-out refinancing: Homeowners often use 125% loans to refinance and extract more cash than available through home equity, for purposes such as paying off higher-interest debt (credit cards, personal loans) or funding large expenses.
  • Underwater properties: These loans can serve borrowers whose homes are valued below their outstanding mortgage balances.

Advantages and disadvantages

Advantages
– Access to more cash than standard refinancing or home-equity products, which can help homeowners who lack sufficient equity.

Disadvantages
– Higher interest rates and fees compared with traditional mortgages.
– Increased borrower debt and risk of being underwater.
– Greater lender risk; in default scenarios, foreclosure proceeds may not cover the loan balance.

Alternatives

If a 125% loan isn’t suitable, consider:
– Home equity loan: Lower interest rates than high-LTV refinance, but provides less cash.
– Home equity line of credit (HELOC): Revolving credit secured by home equity.
– Cash-out refinance: Replaces existing mortgage with a larger one based on current value (typically limited to lower LTVs).
– Home equity investments: Third-party capital in exchange for a share of future home value appreciation (non-debt option).

Brief history

  • Popularity grew in the 1990s for borrowers seeking extra cash.
  • High-LTV products, including 125% loans, contributed to borrower vulnerability during the 2007–08 housing crisis as property values fell and many borrowers became underwater.
  • The Home Affordable Refinance Program (HARP), introduced in 2009, allowed some underwater borrowers to refinance—including those owing up to and later above 125% of value—at lower rates. HARP ended in 2018.
  • Today, 125% loans are less common but remain available from some lenders, typically with strict qualification criteria and higher costs.

Quick answers

  • What does 125% financing mean? Borrowing up to 125% of the home’s appraised value through a refinance or leveraged mortgage.
  • Can you get a 90% LTV? Yes. A 90% LTV means the mortgage equals 90% of the home value (e.g., $270,000 loan on a $300,000 home). Lower down payments are possible, but higher down payments or mortgage insurance rules affect LTV requirements.
  • Can you take equity out without refinancing? Yes—options include home equity loans, HELOCs, and other equity-investment products.

Bottom line

A 125% loan can provide substantial cash for homeowners with limited equity or underwater mortgages but carries materially higher costs and risk for both borrower and lender. Compare alternatives, obtain multiple quotes, and carefully weigh long-term affordability before pursuing a high-LTV refinance.