A “125% loan” typically refers to a type of mortgage or home equity loan in which the borrower can borrow up to 125% of the appraised value of their home. In other words, the loan amount exceeds the current value of the property, allowing the borrower to borrow more than the home is worth.

Here’s a breakdown:

1. **Loan-to-Value (LTV) Ratio:** The loan amount is expressed as a percentage of the appraised value of the property. In a 125% loan, the loan-to-value ratio would be 125%. For example, if a home is appraised at $100,000, the borrower could potentially borrow up to $125,000 (125% of $100,000).

2. **Purpose:** These types of loans were more common before the 2008 financial crisis. They were often used for debt consolidation or home improvement when homeowners wanted to tap into the equity in their homes, even if the home value did not fully support the loan amount.

3. **Risks:** While a 125% loan provides the borrower with access to additional funds, it comes with significant risks. If the value of the home decreases, the borrower could end up owing more on the loan than the home is worth. This situation, known as being “underwater” or having negative equity, can create financial challenges.

4. **Availability:** After the housing market crisis in 2008, lenders became more cautious, and these types of loans became less common. In many cases, lending practices have shifted to more conservative loan-to-value ratios.

It’s important for borrowers to carefully consider the terms and risks associated with loans, especially those with high loan-to-value ratios. Understanding the terms of the loan, the potential for home value fluctuations, and the ability to repay the loan is crucial to making informed financial decisions. If you are considering a loan, it’s advisable to consult with a financial advisor or mortgage professional to explore the options and implications based on your specific financial situation.