Risks Of High-LTV Loans

High LTV mortgages are home equity loans made to borrowers secured by a mortgage on the property. Typically the liens of these mortgages are in a second position, that is, they are subordinated to the first mortgage on the property, which may be held by a different institution. Unlike home equity loans or HELOCs, in a High LTV loan, the balance of the combined loans (i.e., the first and second mortgages) exceeds the value of the property. In some cases the loan to value ratio of the combined loans may be up to 125%.

There are certain risks to high LTV loans:

• High loan-to-value products raise a borrower's debt level above the value of their home -- to as much as 125 percent.
• Some lenders push the envelope with 150 percent and 165 percent LTV's, but 125 percent is the most common. Non-bank specialty lenders have dominated the market, but the number of FDIC-insured institutions offering them is on the rise. 
• "Home equity" is actually a misnomer for such loans. "Once you surpass your equity worth, you're talking about unsecured debt," says Steve O'Connor of the Mortgage Bankers Association. 
• Imagine selling your home and having to pay off the mortgage, plus come up with $25,000 at closing to pay off the second mortgage. Also consider that, despite what some lenders might lead you to believe, the interest on the amount that exceeds your home's value is NOT tax-deductible. 
• The risk of such loans is not the only thing that is high. The interest rates are typically lower than most credit cards but much higher than the average for a regular home equity loan. 
• Despite its many drawbacks, the product can benefit folks who want to consolidate high-interest debt and plan to stay in one place a long time. One ironic thing in the consumer's favor: since the amount that exceeds the home's value is unsecured, a lender cannot take assets to recoup that money. 
  

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