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"A 125% loan refers to a type of mortgage or loan where the amount borrowed is 125% of the value of the property or asset being financed."
A 125% loan refers to a type of mortgage or loan where the amount borrowed is 125% of the value of the property or asset being financed. In other words, the borrower is borrowing more than the actual appraised value of the property.
Typically, in a standard mortgage scenario, the lender would offer a loan amount that is a percentage of the property's appraised value, often around 80% to 90% of the value. The borrower would then need to cover the remaining percentage (down payment) as their equity in the property. For instance, if the property is appraised at $200,000 and the lender provides an 80% loan-to-value ratio (LTV), the borrower would receive a loan of $160,000 and would need to pay the remaining $40,000 as a down payment.
However, in a 125% loan scenario, the lender is willing to provide a loan amount that exceeds the appraised value of the property. This means that the borrower is not required to make a down payment and, in fact, could receive additional funds beyond the value of the property. These additional funds can be used for various purposes, such as consolidating debt or covering other expenses.
125% loans were more common before the global financial crisis of 2007-2008, and they were often associated with higher risks for both borrowers and lenders. After the financial crisis, these types of loans became less prevalent due to their inherent risk and the stricter lending regulations that followed.
Types of 125% Loan:
1. 25% Home Equity Loan: This type of loan allowed homeowners to borrow up to 125% of their home's appraised value. It was typically used to consolidate debt, make home improvements, or cover other expenses. These loans were considered high-risk because they could lead to negative equity, where the loan balance exceeds the value of the property.
2. 125% Mortgage Refinance: In some cases, homeowners sought to refinance their existing mortgage, allowing them to borrow more than their current outstanding loan balance. The additional funds could be used for various purposes, but again, it carried the risk of accumulating more debt than the property was worth.
Numerical example of 125% loan with interest rates and loan paying period.
Let's create a hypothetical numerical example of a 125% home equity loan to illustrate how it might work, including the paying period and interest rate. Please note that this example is for illustrative purposes only, and actual loan terms may vary based on lenders and individual circumstances.
Assumptions:
Property Value: $200,000
125% Loan Amount: 125% of $200,000 = $250,000
Interest Rate: 5% per annum (annual interest rate)
Paying Period: 15 years (180 monthly payments)
Calculation of Monthly Payment:
To calculate the monthly payment, we can use a standard loan amortization formula. The formula to calculate the fixed monthly payment on a mortgage loan is:
M = P { (r(1+r)n / ((1+r)n - 1) }
Where:
M = Monthly Payment
P = Loan Amount
r = Monthly Interest Rate (annual interest rate divided by 12 and expressed as a decimal)
n = Total Number of Monthly Payments
Monthly Interest Rate: (5% / 12 ) = 0.00417
Total Number of Monthly Payments: 180
Now, let's plug the values into the formula:
M = 250,000 { ( 0.00417(1+0.00417)180 / (( 0.00417(1+0.00417)180 -1) }
Using a calculator, the monthly payment comes out to be approximately $2,031.48.
Paying Period: 15 years (180 monthly payments)
Interest Rate: 5% per annum (0.00417 as a monthly rate)
Therefore, the borrower would make monthly payments of approximately $2,031.48 over the course of 15 years (180 months). Keep in mind that this is a simplified example, and actual loans may have additional fees, costs, and variations in interest rates based on factors like credit score and market conditions.
It is essential to consult with a financial expert and a lender to get accurate and up-to-date information for your specific situation.