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If a
borrower's
LTV ratio
exceeds 80
percent,
lenders
compensate
by charging
higher
interest and
loan fees,
as well as
private
mortgage
insurance (PMI)
to protect
the lender
in case the
borrower
defaults.
Nowadays,
LTV ratios
that can
reach as
high as 125
percent or
more are
becoming
more common.
A 125
percent home
equity loan
means that
you are
borrowing
over and
above the
value of
your home.
Generally,
borrowers
take on 125
percent
loans to pay
off credit
card bills
or other
debts.
Although
loans with
high LTV
ratios have
much higher
interest
rates than
traditional
home equity
loans, they
can still
often be
lower than
interest
rates on
some credit
cards.
Despite
this, 125
percent
loans can be
risky and
the
consequences
can be
disastrous
if you can't
come up with
the money to
pay it back.
Imagine
having to
sell your
$100,000
home and
then have to
come up with
an
additional
$25,000 just
to cover
your
debt.
Other
disadvantages
with such
high loans
are that the
interest on
any portion
of your home
equity loan
that exceeds
100 percent
is not tax
deductible.
Therefore,
extreme care
should be
taken when
considering
this kind of
loan.
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