What is a 125% loan?
A 125% loan is a mortgage-style loan that lets a homeowner borrow an amount equal to 125% of a property’s appraised value. In loan terminology this is expressed as a loan-to-value ratio (LTV) of 125%. LTV = (loan amount ÷ appraised property value) × 100. Lenders treat loans with LTVs above 100% as higher risk because the loan principal exceeds the collateral’s market value.
How a 125% loan works (step-by-step)
1. Appraisal: Lender orders an appraisal to determine the current market value of the home.
2. Loan sizing: The lender sets the maximum cash available as 125% of that appraised value (subject to underwriting rules).
3. Underwriting: The borrower’s income, credit score, debt, and other factors are reviewed. Because the loan is above 100% LTV, underwriting tends to be stricter and interest rates higher.
4. Closing: If approved, borrower receives cash (often used to pay off other debts) and signs a mortgage or deed of trust securing the loan with the property.
5. Repayment and risk: Borrower repays per loan terms. If default occurs and the home is sold, the lender may not recover the full loan due to the loan’s size relative to the property value.
Numeric example
– Appraised value: $300,000
– 125% LTV loan amount = 1.25 × $300,000 = $375,000
If you take this loan to pay off an existing $280,000 mortgage, the new net cash available would be $375,000 − $280,000 = $95,000 before closing costs and fees.
Why borrowers consider 125% loans
– Access to cash when home equity is low or negative (the property is “underwater”).
– Can be used to consolidate higher-interest consumer debt (credit cards, personal loans).
– May be an option when other refinancing paths are closed off.
Main advantages
– Larger immediate cash access than conventional refinances or home equity loans when equity is limited.
– Potential to consolidate expensive unsecured debt into a (secured) mortgage structure.
Main disadvantages and risks
– Higher interest rates: Lenders price higher LTV loans to reflect greater risk—rates can be materially above conventional mortgage rates.
– Additional fees: Underwriting and insurance costs can be higher.
– Greater borrower indebtedness: You owe more than the property is worth; future sales may not cover the loan balance.
– Lender shortfall risk: If borrower defaults, foreclosure sale may not fully repay the lender.
– Contribution to systemic risk: Large-scale use of over-100% LTV products contributed to problems in the 2007–08 mortgage crisis.
History: how 125% loans fit into the housing cycle
Products that allowed borrowing above 100% LTV were used in the 1990s and 2000s and became one factor in the run-up to the 2007–08 housing crisis. During and after the crisis, government programs such as HARP (Home Affordable Refinance Program) provided ways for underwater borrowers to refinance; HARP initially helped borrowers up to 125% LTV and was later expanded before it ended in 2018.
Alternatives to a 125% loan
– Home equity loan: Lump-sum second mortgage using property as collateral. Typically lower LTV limits and lower rates than an above-100% loan.
– Home equity line of credit (HELOC): Revolving credit secured by home equity; usable without full refinance.
– Cash‑out refinance: Refinance existing mortgage for a larger amount and take the difference in cash—usually limited by conventional maximum LTV rules.
– Non‑home secured or unsecured options: Personal loans, balance transfers—may have higher rates but don’t increase mortgage exposure.
Can you get a 90% LTV?
Yes. A 90% LTV means the loan equals 90% of the appraised value. For example, $270,000 on a $300,000 home equals 90% LTV. Conventional mortgages often require lower LTVs (e.g., 80% without private mortgage insurance) depending on product and lender.
Can I take equity out of my house without refinancing?
Yes. Common methods:
– Home equity loan (closed-end second mortgage).
– HELOC (open-end credit line).
– Home equity investment or shared-appreciation arrangements (non-loan structures in some markets).
These options let you access cash without replacing your existing mortgage, though they create additional liens against the property.
Checklist for someone considering a 125% loan
– Verify the appraised value and understand how the appraisal affects LTV.
– Compare effective interest rates (including discount points) among lenders.
– Calculate closing costs, origination fees, and any mortgage insurance.
– Run a break-even analysis: how long until consolidated debt savings (if any) offset higher mortgage costs?
– Consider alternatives (HELOC, home equity loan, cash‑out refinance) and their LTV/rate trade-offs.
– Assess the risk of being underwater and your exit plans (ability to keep the home, sell at a loss, or make higher payments).
– Speak with a housing counselor or non‑profit advisor if you’re underwater or struggling financially.
Assumptions and caveats
– Availability and terms vary by lender, jurisdiction, and borrower creditworthiness.
– Many lenders impose maximum LTV caps below 125% or prohibit loans above 100% for typical borrowers.
– Regulatory and program changes (e.g., government refinance programs) can change options.
Selected reputable sources
– Federal Reserve History — Subprime Mortgage Crisis: https://www.federalreservehistory.org/essays/subprime-mortgage-crisis
– Federal Deposit Insurance Corporation (FDIC) — Relief Refinance/HARP information and related resources: https://www.fdic.gov
– Consumer Financial Protection Bureau (CFPB) — Home equity loans and lines of credit: https://www.consumerfinance.gov/owning-a-home/explore/home-equity-loans-lines-of-credit/
– Investopedia — general mortgage/LTV explanations (overview articles on LTV and refinancing): https://www.investopedia.com
Educational disclaimer
This article is for educational purposes only and is not personalized financial, legal, or investment advice. Terms, availability, and costs for loans vary by lender and region. Consult a qualified mortgage professional, housing counselor, or financial advisor before taking any loan.