125% Financing - A 125% financing allows you to purchase a home with no money down, and allows you to receive cash, up to 25% over the purchase price of the home. The extra cash received at closing can be used for home repairs, debt consolidation, or anything else that you may wish.
These are a good idea if the 25% overage is going to be used to increase the value in your home!
You may not be able to deduct the interest paid on the portion of your loan which is greater than the value of your home. Consult your tax specialist for more information.
It is more common to have a second mortgage or Home Equity Line of Credit (HELOC) that is equal to 125% of your home value.
If you are in a hot market were your home is appreciating at a rapid pace then this loan would not put you in as much risk than if you were in an area or economy where the appreciation was moving slowly.
You can expect to recieve a higher interest rate for these loans, becuase of the high risk to the lender.
125% LTV loans are only for borrowers who believe that their home will be worth at least 25% more when it comes time to sell it, unless they have other means to cover the difference.
When you're rehabbing or remodeling your existing home, the 125% loan makes sense because you're tapping the future equity of your home.
Not many investors offer this program anymore. It was a popular loan in the late 90's until about 3 years ago. However, it is still available with select lenders. You need to have excellent credit to qualify for this program since the risk to the lender is high.