Another type of home equity loan is the 125% Loan-to-Value (LTV) program, which is essentially an unsecured loan. The “125%” refers to the fact that this loan brings the mortgage liens against the property to 125% of the property’s value.
For example, Nora’s home is valued at $400,000. Her first mortgage balance is currently at $300,000. However, Nora needs $200,000 for a short-term investment into a business venture.
Nora can use the 125% LTV program to obtain a home equity loan of $200,000. This would bring her total mortgage liens to $500,000 ($300,000 + $200,000). Because her home is only worth $400,000, her mortgage liens are 125% of the property’s value: that last $100,000 is essentially unsecured.
This is still a home equity loan, in that it is a mortgage lien against the property. However, this 125% LTV mortgage loan is very high-risk for the lender in that the lender has no hope of ever regaining the loans fund if the borrower ever defaults.