You can harness the equity in your home and put it to work for you by getting a home equity loan. But beyond the actual equity in your home, you may be able to borrow even more than your home’s value. A 125 percent loan-to-value home equity refinance loan – called a 125 refinance for short – allows eligible borrowers to borrow 125 percent of their home’s value. Your first step toward getting a 125 refinance is going on a shopping trip to find a lender.
Shopping for 125 Refinance Lenders
You don’t have to use the same lender that services your first mortgage for your 125 refinance loan, but you may want to start here first. If you have a stellar track record of making your mortgage payments, your current lender may make you the best deal for a 125 refinance. One of the primary reasons you'll want to talk to multiple lenders is to compare the different interest rates that each one offers. A 125 refinance loan is a second mortgage, which carries a higher risk to a lender.
Interest Rates for 125 Refinances
For most conventional first mortgages, the loan amount represents 80 percent or less of the home’s value. But because a 125 refinance loan exceeds the value of a home, you’ll pay a higher interest rate to help mitigate the lender’s risk. As an example, you may have to pay an interest rate of 5 to 6 percent higher than a conventional mortgage for your 125 refinance.
Closing Costs and Loan Fees
You’ll also owe closing costs and other fees when your 125 refinance loan closes, which may include an application/processing fee, an origination fee, an underwriting fee, title fees, a recording fee and an appraisal fee. Ask each prospective lender about these fees and other closing costs so that you can compare the total cost of your 125 refinance among different lenders.
Qualifying for a 125 Refinance
Qualifying for a 125 refinance is similar to qualifying for a conventional mortgage. A prospective lender will assess your income and credit history, and the lender will also calculate your debt-to-income ratio (DTI). As a rule of thumb, your total debt cannot exceed 43 percent of your income to qualify for a 125 refinance loan.
Determining Your Home's Current Value
When you decide on a lender, the lender will order an appraisal of your home to determine its current value. Even if you had an appraisal a couple of years ago, the lender will likely want a new appraisal to confirm the former appraisal’s value or to update the value. If you’ve made any home or landscape improvements since the property’s last appraisal, these improvements may add value to a new appraisal. And in some markets, regardless of whether you’ve made improvements or not, appraised values can change significantly over a short time period.
Calculating the Loan-to-Value Ratio
After your lender determines the value of your home, based on a new appraisal, the lender will calculate the loan-to-value (LTV) for your 125 refinance loan. Loan-to-value is mathematically expressed as a percentage that represents the mortgage amount divided by the appraised property value. For example, if the appraised value is $200,000, you may be eligible to borrow $250,000 which is 125 percent of $200,000.
Using Your 125 Refinance Proceeds
After your 125 refinance loan closes, you can use the proceeds any way you wish such as making home improvements or consolidating other debt. And even though a 125 refinance carries a higher rate of interest than a conventional first mortgage, its interest rate may be much lower than, for example, some credit cards or other revolving debt. By paying off debts with higher interest rates, a 125 refinance allows some consumers to reduce the amount of total monthly debt payments and consolidate these debts into one loan payment.
- Mortgage 101: 125% LTV Home Equity Loan Costs to Expect
- Consumer Reports: Here's How Much Mortgage You Can Actually Afford
- Consumer Affairs: Home Equity Loan Requirements
- Loan-to-value ratio - Wikipedia
- 125 (number) - Wikipedia
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Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.