Appraisal
A professional assessment of a home's current market value, performed by a licensed appraiser. Required by most lenders to determine how much equity exists.
The words, unpacked.
A home equity vocabulary you can actually use. Look up a term, then get back to the decision at hand.
Cash-Out Refinance
A new mortgage that replaces the current mortgage with a larger one, providing cash after the existing loan and applicable costs are paid.
Collateral
An asset pledged to secure a debt. With home equity borrowing, the home is collateral and may be at risk if payments are not made.
Combined Loan-to-Value (CLTV)
The ratio of all loans secured by a property (primary mortgage + any equity products) to the property's appraised value. Lenders use CLTV to limit total borrowing.
Debt-to-Income Ratio (DTI)
Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. A key qualification factor for lenders — lower is better.
Draw Period
The initial phase of a HELOC (typically 5–10 years) during which you can borrow, repay, and re-borrow from your credit line. Followed by the repayment period.
Fixed Rate
An interest rate that stays the same for the period specified in the agreement.
HELOC
A home equity line of credit: borrowing secured by a home that allows draws up to a limit during an agreed draw period.
Home Equity
The estimated value of a home minus all outstanding debts secured by it. Equity changes as balances and the property value change.
Home Equity Loan
A loan secured by the home that provides funds in a lump sum, usually with a fixed interest rate and a defined repayment schedule.
Interest
The cost charged for borrowing money. The rate and repayment schedule affect how much interest is paid over time.
Lien
A legal claim against a property used as security for a debt. Your mortgage is a lien. Home equity products add additional liens to your property until the debt is repaid.
Loan Estimate (LE)
A standardized disclosure used for many closed-end mortgages to summarize terms, projected payments, and estimated closing costs. HELOCs use different disclosures; ask which documents apply to your product.
Prime Rate
A benchmark interest rate that tracks the Federal Reserve's federal funds rate. Most HELOCs are priced at Prime + a margin, so when the Fed moves, your rate moves too.
Principal
The amount borrowed that remains to be repaid, excluding interest and other charges.
Repayment Period
The phase after a HELOC draw period when additional borrowing ends and the remaining balance must be repaid under the agreement.
Second Mortgage
A loan secured by your home that is subordinate to your primary mortgage. Home equity loans are second mortgages. In case of foreclosure, the primary mortgage is paid first.
Subordination
The legal ranking of liens on a property. Your primary mortgage is in "first position"; a HELOC or home equity loan is in "second position," repaid after the first mortgage in a foreclosure.
Underwater / Negative Equity
When the outstanding balance on your mortgage exceeds the current market value of your home. You owe more than the home is worth, limiting your options to sell or refinance.
Variable Rate
An interest rate that can change according to the index, margin, and adjustment terms in the agreement.