Definition:
A mortgage loan of 125% is offered to homeowners who find that the value of their home is less than what they owe. A 125% loan is considered a refinancing option for homes that are worth less than the amount owed on them.
Definition and Examples of a 125% Loan
Although there are several paths you can take if your home suddenly becomes upside down, or is worth less than you owe, refinancing with a 125% loan may be a viable option. This type of loan emerged during the Obama administration and was known as the HARP loan. Steven Harless, a senior officer in the mortgage lending department at First Community Federal Bank, said in an email to The Balance that the Home Affordable Refinance Program (HARP) was created in 2009 by the U.S. government to help homeowners who were unable to refinance their homes due to decreased values. The program ended after nearly a decade in 2018.
“Interest rates were reduced to help homeowners save money to avoid default, and adjustments were made to the loan-to-value (LTV) ratio limit to ensure that as many people as possible could successfully refinance,” Harless said.
During the existence of the HARP program, the program allowed homeowners to transfer their existing private mortgage insurance (PMI) to a new loan, or refinance without needing PMI at all. Borrowers who refinanced through HARP reported lower delinquency rates than HARP-eligible borrowers who did not refinance through the program.
Note: After the HARP program ended in 2018, the 125% loan remained available as an option for homeowners whose property values are less than their mortgage balance. Essentially, it follows the same model today: homeowners can refinance their mortgage with a loan that does not exceed 25% of the total property value.
Alternative Name: High Loan-to-Value Refinance Option
How a 125% Loan Works
A 125% loan becomes necessary when a homeowner has a high loan-to-value ratio and needs to refinance a mortgage that exceeds the value of the property – up to 125% of its value.
If a homeowner realizes that their property’s value is less than the amount owed on their mortgage, the first step towards this type of refinancing would be to contact a mortgage loan officer. Then, the homeowner will complete the refinancing application process.
Typically, a borrower qualifies for a mortgage loan based on a review of credit, income, assets, and property. “We will pre-approve a potential refinance application the same way we would pre-approve for purchasing a home. Once the application is reviewed, we can see if a product like [a 125% loan] is necessary,” Harless said.
“The benefit of programs like these is to allow homeowners to achieve refinancing with less ‘weight’ or emphasis on the risks associated with the home’s value,” Harless said. “These loans are typically already backed by FNMA or FHLMC [Fannie Mae or Freddie Mac], so those entities are willing to take on that risk to help the buyer obtain a better mortgage and reduce the chances of default.”
Note: Homeowners typically need to be current on their mortgage payments to qualify.
Harless explained the next steps in the 125% loan process: “Depending on the shape of the loan request, the application may include closing costs, which will increase the amount owed. However, some options can be obtained without closing costs. Costs and rates are tailored to what the client feels comfortable with.”
Provides
A 125% loan offers refinancing options for homeowners needing adjustments to their mortgage when their home’s value is less than the amount owed on their current balance.
Takeaways
– A 125% loan is a refinancing option for homeowners whose property values are less than the amount owed on their mortgage.
– A 125% loan allows homeowners to refinance up to 125% of the current property value.
– The 125% loan product was created for the federal mortgage relief program HARP, which started at the end of the Great Recession and continued until 2018, but these loans are still available today.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Federal Housing Finance Agency. “Home Affordable Refinance Program (HARP)”. Accessed September 21, 2021.
Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Federal Housing Finance Agency. “Home Affordable Refinance Program (HARP)”. Accessed September 21, 2021.
Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Federal Housing Finance Agency. “Home Affordable Refinance Program (HARP)”. Accessed September 21, 2021.
Source: https://www.thebalancemoney.com/what-is-a-125-loan-5202212
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