A high loan-to-value (HLTV) mortgage or home equity loan is one that equals or exceeds the value of a borrowers home -- sometimes reaching as high as 125% to 150%. Some lenders market this type of loan toward people who have run up considerable credit card and other consumer debts because it can consolidate outstanding debt and lower borrowing costs.
In exchange for offering their home as collateral, borrowers are charged lower interest rates than they would pay on unsecured consumer loans. Lower interest rates coupled with long maturities (up to 30 years) make monthly payments attractive, because they often are less than the monthly payments of the loans paid off in consolidation.
Still, there are potentially serious drawbacks. Many borrowers think HLTV loans are mortgage loans and accordingly believe interest payments are tax-deductible. But Internal Revenue Service rules prohibit interest deduction on any part of a mortgage that exceeds the market value of the house.
Lenders place emphasis in underwriting for HLTV loans on the borrowers credit quality as opposed to collateral value. For example, lenders evaluate applicants on credit scores, financial stability, and ability to handle payments. They are enacting new lending guidelines and increasing credit score requirements to ensure that HLTV loans perform successfully and to weed out risky borrowers.
When managed properly, HLTV loans are safe and profitable for the lender. The biggest disadvantage of converting unsecured credit card and consumer debt to an HLTV loan is that in case of default, the borrower could lose his or her home. Still, many people burdened by the high cost of unsecured consumer debt are willing to take the risk in order to lessen their monthly payments. If you're in that situation, talk to a loan officer at Pacific Advantage CU at (866) 896-5783 for information about safe options.
Copyright 2000 Credit Union National Association Inc. Information subject to change without notice. For use with members of a single credit union. All other rights reserved.
