Lending Lingo: Home Equity

When you apply for a home equity loan, you will be bombarded with a lot of unfamiliar terms and acronyms. Here is a glossary of important home equity lending lingo.

Adjustable Rate

A mortgage loan interest rate that is tied to a certain index or indicator, like T-bills or the prime interest rate.

APR

Annual percentage rate. This is the annual cost of a home equity mortgage loan, including interest expense, all charges and fees, and points. The number is expressed as a percentage of the loan. APR is usually the best way to compare home equity loans across lenders because, by law, they must all compute the figure the same way.

Collateral

A physical piece of property or other asset that secures the loan. With home equity mortgage loans, the collateral is your home. If the debt is not repaid as agreed, the lender has the right to foreclose on your home.

Fixed Rate

A rate that is determined during closing and stays the same for the duration of the loan's term.

Foreclosure

When a lender takes possession of a property because the borrower failed to repay a loan according to the terms of the home equity mortgage loan agreement.

Loan-to-Value Ratio (LTV)

A percentage that is calculated by dividing the amount of the mortgage by the home's appraised value or sale price, whichever is lower. Lenders use LTV in issuing home equity loans in order to determine how large of a loan you can handle. Lenders do not often lend 100% of a home's value because that gives them no leeway in the event that property values decline.

Prime Rate

The interest rate that commercial banks charge large corporations. This figure is used as a benchmark for loans across the country. Usually, home equity mortgage loans will have interest rates tied to the prime rate, but lenders typically add a small margin on top of this rate.

Second Mortgage

Any loan taken out against a home on which a first mortgage still exists.

Term

The length of your home equity mortgage loan before it reaches maturity.