As you may have guessed, the acronym “HELOC” is not a wrestling move. Instead, it’s one of many terms you should know before tapping your home equity to consolidate debts or finance a home improvement. Refer back to this glossary whenever you need to translate obscure home equity lending jargon.
|2.||Credit insurance||9.||No documentation|
|4.||High-LTV equity loan||11.||Piggyback loan|
|5.||Home equity debt||12.||Predatory lenders|
|6.||Home equity loan||13.||Second mortgage|
2. Credit insurance — A policy that pays off the card debt should the borrower lose his job, die or become disabled. The structure of protection for a revolving credit card debt is calculated each month to cover only the debt that existed at the last billing cycle.
3. Equity — The difference between a home’s current appraised value and what you owe on it. For example, your equity is $133,000 if your home is worth $300,000 and you owe $167,000.
4. High-LTV equity loan — A home equity loan that creates a total loan-to-value ratio of 125 percent or more. When the total principal of loans leaves homeowners with debt exceeding the fair market value of the home, the interest paid on the portion of the loan above that value may not be tax-deductible.
5. Home equity debt — Debt secured by your home. Home equity interest usually is deductible as an itemized deduction.
6. Home equity loan — A loan based on the amount of equity a homeowner has in the property. The interest paid on a home equity loan is usually tax-deductible. Unlike a home equity line of credit (HELOC), the home equity loan features a fixed rate, payment and term, usually five to 15 years. Bankrate gathers quotes based on a $10,000 (or minimum loan amount offered if it is more than $10,000) fixed-rate loan with a term of 60 months.
7. Home equity line of credit (HELOC) — A home equity line of credit is an open-ended loan, paid as revolving debt, that is backed by the portion of the home’s value the borrower owns outright. Interest paid on a home equity line of credit is usually deductible.
8. Mortgage broker — One who finds lenders for prospective borrowers who meet the lenders’ criteria. A mortgage broker does not make the loan but receives payment for services.
9. No documentation — A mortgage in which the applicant provides a minimum of information — name, address, Social Security number (so credit reports can be pulled), and contact information for an employer, if there is one. The underwriter decides on the loan based on the applicant’s credit history, the appraised value of the house and size of down payment.
10. Repayment period — In a home equity line of credit, that portion of the life of the loan that follows the draw period. During the repayment period, the borrower cannot take out any more money and must pay down the loan.
11. Piggyback loan — A piggyback loan is a combination home loan, designed to avoid mortgage insurance, for borrowers who make down payments of less than 20 percent. A piggyback consists of a primary mortgage for 80 percent of the home’s value, plus a second mortgage for the rest of the money needed. Loans structured this way avoid the need for mortgage insurance. The second mortgage is either a fixed-rate home equity loan or a variable-rate home equity line of credit.
Predatory lenders — Lenders who take advantage of borrowers by employing a variety of shady financial practices. They may ask for money up front, charge very high interest rates or excessive fees, steer borrowers into larger loans, hide costs, or use high-pressure tactics.
13. Second mortgage — A loan using a home’s equity as collateral and which is subordinate to the original mortgage (i.e., the first mortgage has priority before all others). Equity loans and lines of credit often have a repayment period of 15 years, though it might be as short as five and as long as 30 years.
14. Settlement — Also called a closing, it’s the meeting at which the sale of a property is completed. The buyer signs the lender agreement for the mortgage and pays closing costs and escrow amounts. The buyer and seller sign documents to transfer ownership of the property.
For a complete list of home equity terms, check out our financial glossary.