High Loan To Value Definition

A “high-loan-to-value”, or HLTV, mortgage or home equity loan is one that equals or exceeds the value of the borrower’s home. Another term for this loan is a “negative equity mortgage”. HLTV loans can let you borrow as much as 25% to 50% more than your home is worth. 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.

A mortgage in which the ratio of the amount of the loan is relatively high compared to the value of the property securing it. For example, if the value of a house is $250,000 and the value of the mortgage is $240,000, the loan-to-value ratio is 96%, which is considered high. A high loan-to-value mortgage indicates high risk to the lender because, if it forecloses, it may not be able to sell the house for enough money to compensate itself for the principal plus interest of the original mortgage.

What is deductible?

The interest on a high-loan-to-value loan is tax deductible except for the amount that exceeds the current value of your property. For example, say you own a home which you could sell for $120,000 and you are carrying a $100,000 mortgage. A lender offers you a 125% loan for $150,000. You have boosted your debt by $30,000. The interest on your high-loan-to-value loan is deductible up to the permissible ceiling amount. In this case, $20,000 is deductible while $30,000 is not tax-deductible.

Current value of home $120,000
HLTV loan percentage
X 25%
HLTV loan amount $150,000
Current value of home
$120,000
Increase in debt $ 30,000
Current value of home $120,000
Current mortgage amount
$100,000
Allowable interest deduction $ 20,000

The interest payments on the $30,000 is not tax deductible. The IRS does not allow interest deductions on any part of a mortgage that exceeds the market value of the house.

Why Get A High Loan To Value Loan?

Why then would someone want an HLTV loan? Generally the annual interest rate is lower on a HLTV loan than the interest rate on credit cards. Also, the interest that is applicable to the equity of the house is fully deductible. Despite it’s drawbacks, a high-loan-to-value loan can benefit those who want to consolidate high-interest debt and plan to stay in one place a long time. One thing to note is that since the loan amount that exceeds the home’s value is unsecured, a lender cannot take assets to recoup that money.

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