A 125% loan is a type of loan that allows a borrower to borrow up to 125% of the value of the collateral being used as security for the loan. This means that if the collateral is valued at $100,000, the borrower would be able to borrow up to $125,000. This type of loan is often used for home equity loans, home equity lines of credit, or second mortgages.
This type of loan is considered to be a high-risk loan, as the borrower is able to borrow more than the value of the collateral. This means that if the borrower is unable to repay the loan, the lender may not be able to recoup the full amount of the loan from the sale of the collateral.
125% loan is not as common as other types of loan, and also is not available in all areas. Also, lenders are more likely to approve these types of loans to borrowers with good credit and stable income.
Borrowers should be aware that these loans often have higher interest rates and fees than traditional loans, and the terms may not be as favorable. It is important for borrowers to carefully consider their financial situation and the risks associated with a 125% loan before deciding to take one out.
Pros and cons of 125% Loan
A 125% loan can provide a homeowner, particularly one with limited home equity or a property that has decreased in value, with the opportunity to access more cash. However, this type of loan comes with added risk for both the borrower and the lender. The borrower will be responsible for a larger amount of debt and the lender runs the risk of not recouping the full amount of the loan if the borrower defaults on the loan. In such cases, the lender may foreclose on the property and sell it, but there is a high likelihood that the lender will not recover the entire amount of the loan.
About 125% Loan History:
125% loans were popular in the 1990s, particularly for borrowers with high credit scores who desired to borrow more than their available home equity. These loans, along with other factors, contributed to the 2007-2008 housing crisis. The collapse of the real estate market left many homeowners owing more money on their mortgages than their homes were worth. This, combined with the decrease in home values, made it difficult for homeowners to refinance and recoup their losses.
To address this issue, the federal Home Affordable Refinance Program (HARP) was introduced in 2009. It allowed homeowners who were current on their mortgages and in good standing, but had little to no equity in their homes, to refinance at lower rates. Initially, the program only allowed homeowners who owed up to 125% of the value of their homes to apply. Later, the maximum loan-to-value (LTV) ratio was removed, allowing more homeowners to apply for HARP loans. The program ended in December 2018.