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A 125 percent LTV home equity loan is a second mortgage that is at a rate that exceeds the home’s value. The loan subordinates to the primary mortgage but credit becomes a chief consideration since the loan is more than the available equity. The interest rate on this type of loan tends to be higher than for traditional mortgages. For the most part, the loan rates tend to be five to six percentage points above traditional mortgages. The higher rates are accepted within the lending industry because it is considered a second mortgage and is riskier than other mortgages. In essence, the lender is allowing a borrower to take a loan amount that is higher than what their property value is.
The typical fees that are associated with this loan program are a loan origination fee, application fee, processing fee, underwriting fee and closing fee. Additionally, there will be third party fees, or escrow, title, appraisal and recording fees assessed with the loan. Even though the resulting loan gives the borrower an excess amount that is over the amount of the home’s equity, the loan is closed like any other loan. Some lenders have streamlined the process, but for the most part, the process remains unchanged.
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