What Is a 125% Loan?

The 125% Loan Explained

Mortgage banker consulting with client couple in a meeting

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A 125% mortgage loan is offered to homeowners who find that their house is valued at less than what they owe on it.

Definition and Examples of a 125% Loan

Although there are several routes you can take if your house is suddenly upside-down, or worth less than you owe, refinancing with a 125% loan might be a viable option.

This loan type came about during the Obama era and was called the HARP loan, Stephen Harless, a senior mortgage loan officer with First Federal Community Bank, told The Balance in an email. In 2009, the Home Affordable Refinance Plan (HARP) was established by the U.S. government to aid homeowners who couldn’t refinance their homes because the properties had declined in value. The program ended after nearly a decade in 2018.

Interest rates were lowered to help homeowners save money to avoid default, and adjustments were made to the limit of loan-to-value ratio (LTV) to make sure as many people as possible could successfully refinance,” Harless said.

During HARP’s tenure, the program allowed homeowners to transfer existing private mortgage insurance (PMI) to a new loan, or to refinance while forgoing PMI altogether. Borrowers who refinanced through HARP posted lower delinquency rates than borrowers eligible for HARP who did not refinance through the program.


Once the HARP program ended in 2018, the 125% loan remained available as an option for homeowners whose property value was less than their mortgage balance.

Essentially, it’s the same model today: Homeowners can refinance their mortgages with a loan that does not exceed 25% of the total value of the property.

For example, if a property is worth $425,000, a qualified borrower seeking a 125% loan can finance $531,250. The lender takes the initial property value of $425,000 and multiplies it by 1.25, or 125%.

Alternate name: high loan-to-value refinance option

How a 125% Loan Works

The 125% loan is necessary when a homeowner has a high LTV and needs to refinance a mortgage greater than the value of the property—up to 125% of it.

If a homeowner realizes their property is valued at less than what they owe on the mortgage, the first step toward this type of refinance would be to reach out to a mortgage loan officer. Then the homeowner would complete the application process for the refinance.

Qualifying for a mortgage is typically based on a review of credit, income, assets, and the property. “We would preapprove a prospective refinance application similarly to getting preapproved to buy a home. Once we review the application, we can see if a product like [the 125% loan] is necessary,” Harless said.

“The benefit of programs like these is to allow homeowners to gain access to a refinance with less ‘weight’ or emphasis on the risk from the value of the home,” Harless said. “These loans are typically already backed by FNMA or FHLMC [Fannie Mae or Freddie Mac], so those entities are willing to allow that risk to help the homebuyer get a better mortgage and reduce chances of default.”


Typically, to qualify, the homeowner would need to be current on mortgage payments.

Harless explained the next steps for the 125% loan process: “Depending on what that application looks like, the application could include closing costs, which would add to the balance owed. However, some options can be had at no closing costs. The costs and rates are custom-tailored, based on what the client is comfortable with.”

A 125% loan offers refinancing options to homeowners in need of adjustments to their mortgage when their home value falls below what they owe on their current balance.

Key Takeaways


  • A 125% loan is a refinancing option for homeowners whose property is valued at less than what they owe on their mortgage.
  • A 125% loan lets homeowners refinance at up to 125% the current value of their property.
  • A 125% loan is a product created for the federal HARP mortgage relief program that was started near the end of the Great Recession and continued until 2018, but these loans are still available today.
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  1. Federal Housing Finance Agency. "Home Affordable Refinance Program (HARP)." Accessed Sept. 21, 2021.

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