125% Loan

DEFINITION of '125% Loan'

A loan, usually a mortgage, with an initial loan amount equal to 125% of the initial property value. In other words, a 125% loan has a loan-to-value ratio (LTV ratio) of 125%.

BREAKING DOWN '125% Loan'

A primary measure of a loan's risk to a lender is the size of a loan relative to the value (LTV ratio) of the underlying property. A 125% loan is a relatively risky loan as compared to a loan with a LTV ratio of less than 100%, and therefore, according to the risk-based pricing method used by lenders, a loan with a LTV ratio of 125% will carry a higher interest rate than a loan with a LTV ratio of 100% or below.

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RELATED FAQS
  1. Why does the loan-to-value ratio matter?

    Learn how the loan-to-value (LTV) ratio is calculated, and why this metric is important to lenders when evaluating a home ... Read Answer >>
  2. How do I calculate how much home equity I have?

    Find out how to calculate the home equity in your home, your home equity percentage and the loan-to-value, or LTV, based ... Read Answer >>
  3. What is a combined loan to value ratio?

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  4. What industries use the loan to value ratio?

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