how a 125 loan works
in financing terminology a 125 loan has a loan to value ltv ratio of 125 the ltv ratio which compares the size of a loan relative to the appraised value of the property that serves as security is used by lenders to judge a loan s default risk a 125 loan is considered riskier than one with an ltv ratio of less than 100 in fact with conventional mortgages the loan size does not typically exceed 80 of a property s value therefore according to the risk based pricing method used by lenders a loan with an ltv ratio of 125 will carry a higher interest rate than one with a lower ltv ratio as much as double in some instances using a 125 loan for refinancinghomeowners who take out a 125 loan usually do so when refinancing their homes to gain access to more cash than they would have available from their home equity their motive might be to use the loan to pay off other debts that carry even higher interest rates such as credit cards but because 125 loans have high interest rates and may also have additional fees anyone who is considering one should plan to shop around for the best terms they can get if your goal is to obtain cash to pay off other debt and you are unable to qualify for a 125 loan or you decide that you simply don t want one then you might still consider a home equity loan you won t get as much cash out of it but the interest rate is likely to be considerably lower and you can use it to pay off at least a portion of your high interest debt another option would be to do a cash out refinance advantages and disadvantages of 125 loansthe advantage of a 125 loan is that it can allow a homeowner especially one who has not accumulated too much home equity or whose property has actually declined in value to obtain more cash than they otherwise could the disadvantage to borrower and lender alike is the added risk compared with a smaller loan the borrower will be on the hook for more debt and the lender will face added risk in case of a default if the borrower does default the lender can foreclose on the property and sell it but the lender is very unlikely to get all of its money back history of 125 loansthe 125 loans first became popular during the 1990s in some cases geared toward low risk borrowers with high credit scores who wanted to borrow more than their available home equity along with other factors 125 loans played a role in the 2007 08 housing crisis the crash of real estate markets around the country kicked off by the subprime mortgage meltdown left many people underwater that is they owed more money on their mortgage than their home was actually worth 3as home values dropped some homeowners who wanted to refinance found that they no longer had enough equity in their homes to qualify for a new loan moreover they could not recoup their losses even if they managed to sell the home the now expired federal home affordable refinance program harp was introduced in march 2009 as a way to offer relief it allowed homeowners whose homes were underwater but who were otherwise in good standing and current with their mortgages to apply for refinancing through harp homeowners who owed up to 125 of the value of their homes could refinance at lower rates to help them pay off their debts and get on sounder financial footing 45originally homeowners who owed more than that percentage could not apply but eventually even the 125 ltv ceiling was removed allowing still more homeowners to apply for harp loans after being extended several times harp ended in december 2018 6