Home Equity Borrowing Glossary
Every Term Explained
30 terms defined in plain English. Last updated April 2026.
The process of paying off a loan through regular scheduled payments over a set period. Each payment covers both interest and a portion of the principal. Early in the loan, more of each payment goes to interest; later, more goes to principal. A fully amortising loan has a zero balance at the end of its term.
The total annual cost of borrowing, expressed as a percentage. APR includes the interest rate plus any fees that are part of the loan cost, such as origination fees. APR is more useful than the stated interest rate for comparing loans because it captures the full cost. When comparing a home equity loan and a HELOC, always compare APR, not just the rate.
A licensed appraiser's formal assessment of a property's current market value. Required by most lenders before approving a home equity loan or HELOC. The appraiser visits the home, inspects its condition, and compares it to recent sales of similar homes in the area. A full appraisal typically costs $300 to $600 and takes 5 to 10 days. The appraisal value determines how much you can borrow.
Related terms: Automated Valuation Model (AVM)
A computer algorithm that estimates a property's value using public records, comparable sales data, and market trends, without a human appraiser visiting the home. Used by online lenders like Figure to enable very fast closings. Generally reliable in active urban markets; less accurate in rural areas or for unusual properties. If an AVM comes in low, some lenders allow you to request a full appraisal instead.
Related terms: Appraisal
A large lump-sum payment due at the end of a loan term. Some home equity loans have balloon structures where monthly payments are interest-only or partially amortising, and a large balance is due at maturity. Balloon payments can be a nasty surprise if you have not planned for them. Most standard home equity loans are fully amortising (no balloon).
Fees paid to get a loan approved and funded. On a home equity loan or HELOC, closing costs typically include: appraisal fee, title search, title insurance, origination fee, document preparation fee, and recording fee. Total closing costs typically range from 2 to 5% of the loan amount. Some lenders waive closing costs on HELOCs to win business; verify this at application.
The asset that secures a loan. If the borrower defaults, the lender can seize or force the sale of the collateral to recover the debt. For a home equity loan or HELOC, the collateral is your home. This is why lenders charge lower rates on home equity products than on unsecured personal loans; they have a real asset to fall back on if you do not pay.
Related terms: Secured Debt
The total of all loans on your home divided by the home's appraised value, expressed as a percentage. CLTV includes your first mortgage plus any home equity loan or HELOC you are applying for. Example: $200,000 first mortgage plus a $100,000 HELOC on a $400,000 home = $300,000 / $400,000 = 75% CLTV. Most lenders cap CLTV at 80 to 85% for home equity products.
Related terms: Loan to Value (LTV)
Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Lenders use DTI to assess whether you can afford additional debt. Most lenders prefer DTI under 43% for home equity products. Calculate your DTI by adding up all monthly debt payments (mortgage, car, student loan, credit card minimums, proposed new payment) and dividing by gross monthly income.
The phase of a HELOC during which you can borrow money up to your credit limit, repay, and borrow again. The draw period typically lasts 10 years. During the draw period, minimum monthly payments are usually interest-only on the outstanding balance. When the draw period ends, the repayment period begins and no new draws are allowed.
Related terms: Repayment Period
The portion of your home's value that you own outright, without debt. Calculated as: current market value of home minus all outstanding loans secured by the home. Example: $400,000 home value minus $200,000 mortgage = $200,000 equity. Equity grows as you pay down your mortgage and as property values rise. You borrow against this equity with a home equity loan or HELOC.
An interest rate that does not change over the life of the loan. Home equity loans have fixed rates. Once your rate is set at closing, it remains the same regardless of what happens to market interest rates. Fixed rates provide payment certainty and protection against rate increases, but you do not benefit if rates fall after you close.
Related terms: Variable Rate
The legal process by which a lender forces the sale of a property to recover unpaid debt. A lender can foreclose on a home equity loan or HELOC if the borrower misses enough payments. The first-mortgage lender gets paid first from sale proceeds; the home equity lender gets what remains. Foreclosure appears on credit reports for 7 years and makes future borrowing significantly more difficult.
Related terms: Lien
A revolving line of credit secured by the equity in your home. HELOC is pronounced HEE-lock. It functions like a credit card but with your home as collateral and at a much lower interest rate. You can borrow, repay, and borrow again up to your approved credit limit during the draw period (typically 10 years). After the draw period, the repayment period begins (typically 20 years) and no new draws are allowed.
Related terms: Draw Period, Repayment Period
A one-time lump-sum loan secured by the equity in your home, also called a second mortgage. You receive the full loan amount on day one and repay it in fixed monthly instalments over a set term (typically 5 to 20 years). The interest rate is fixed for the life of the loan. A home equity loan is different from a HELOC in that it is a single disbursement, not a revolving credit line.
Related terms: Second Mortgage, Fixed Rate
A monthly payment that covers only the interest accrued on the outstanding balance, with nothing going towards the principal. HELOC minimum payments are often interest-only during the draw period. Interest-only payments keep monthly costs low but do not reduce the loan balance. When the HELOC repayment period begins, the full principal is still outstanding and must be paid off over 20 years.
Related terms: Draw Period, Payment Shock
A legal claim on a property that must be paid off when the property is sold. Your mortgage is a lien. A home equity loan or HELOC creates an additional lien (a second lien). If you default and the home is sold, liens are paid in priority order: first lien first, then second lien. Any remaining proceeds go to the homeowner. Unpaid second liens can result in foreclosure even if the first mortgage is current.
Related terms: Second Mortgage, Foreclosure
The ratio of a single loan to the property's market value, expressed as a percentage. Formula: loan balance divided by home value times 100. Example: $320,000 loan on a $400,000 home = 80% LTV. LTV is used to assess risk; higher LTV means less equity cushion for the lender. For home equity products, lenders use CLTV (which includes all loans on the property) rather than simple LTV.
Related terms: Combined Loan to Value (CLTV)
The fixed percentage added to the prime rate to determine your HELOC's interest rate. Set by the lender at the time you open the HELOC and does not change over the life of the line. Example: if your margin is 0.60% and the prime rate is 8.00%, your HELOC rate is 8.60%. A lower margin means a lower rate every time the prime rate changes.
Related terms: Prime Rate, Variable Rate
A fee charged by the lender to process and underwrite your loan application. Usually expressed as a percentage of the loan amount (e.g., 1%) or as a flat fee. Origination fees are part of closing costs. Some lenders charge no origination fee; others charge 0.5 to 2%. This fee directly affects your APR.
Related terms: Closing Costs, APR
A fee charged by some lenders if you pay off a loan early. Prepayment penalties are uncommon on home equity loans and rare on HELOCs, but they do exist. Some HELOC lenders charge an early closure fee (typically $200 to $500) if you close the line within the first 2 to 3 years. Check your loan agreement before making extra payments or paying off the loan early.
A benchmark interest rate used by US banks, typically set at the Federal Funds Rate (set by the Federal Reserve) plus 3 percentage points. As of April 2026, the prime rate is 8.00%. Most HELOC rates are expressed as prime + a margin. When the Federal Reserve raises or cuts its benchmark rate, the prime rate follows, and your HELOC rate changes accordingly.
Related terms: Margin (HELOC), Variable Rate
The original loan amount borrowed, or the outstanding balance remaining on a loan. When you make loan payments, some goes to interest (the cost of borrowing) and some goes to principal (reducing what you owe). On a home equity loan, your monthly payment reduces the principal from the first month. On a HELOC during the draw period, interest-only payments do not reduce principal.
Related terms: Amortisation
The phase of a HELOC after the draw period ends. Typically lasts 20 years. During the repayment period, you can no longer borrow new funds, and the outstanding balance is amortised (paid off in equal monthly instalments). Monthly payments are higher during the repayment period than during the draw period because you are now paying both principal and interest.
Related terms: Draw Period, Payment Shock
The 3-business-day period after closing during which you can cancel a home equity loan or HELOC secured by your primary residence, under the federal Truth in Lending Act (TILA). You can cancel for any reason and owe nothing. The period begins the day after closing. Lenders cannot release funds until after this period expires. Does not apply to investment properties or second homes.
Any loan secured by your home that sits behind your primary (first) mortgage. Both home equity loans and HELOCs are second mortgages. If you default and the home is sold, the first mortgage lender is paid first from sale proceeds. The second mortgage lender gets whatever remains. Because second mortgages carry more risk (they may not be fully repaid), they typically have higher rates than first mortgages.
Related terms: Home Equity Loan (HEL), HELOC, Lien
Debt that is backed by collateral: a physical asset the lender can claim if you default. Home equity loans, HELOCs, and mortgages are secured debt. Car loans and some business loans are also secured. Secured debt typically has lower interest rates than unsecured debt because the lender has a fallback. The trade-off is that you risk losing the collateral (your home) if you cannot pay.
Related terms: Collateral, Unsecured Debt
Legal ownership of a property, documented in public records. Before a lender will approve a home equity loan or HELOC, they conduct a title search to verify that you own the property outright (or with any co-borrowers) and that there are no unexpected liens or claims. Title insurance protects the lender if a title defect is discovered later.
Related terms: Lien
Being underwater or 'upside down' means you owe more on your loans than the property is currently worth. If your home is worth $350,000 and you owe $380,000 across your first mortgage and HELOC, you are underwater by $30,000. You cannot sell without bringing $30,000 to closing. This situation became widespread during the 2008 housing crisis. Maintaining a meaningful equity buffer (not borrowing to the maximum CLTV) reduces this risk.
Related terms: Equity, CLTV
The process by which a lender assesses and verifies all the information on your application before approving a loan. Underwriters check your income documents, credit history, property appraisal, and the title search. They may ask for additional documents ('conditions') during this process. Underwriting is the main reason home equity loan approvals take weeks rather than days, especially at traditional banks.
An interest rate that can change over time, typically tied to a benchmark rate such as the prime rate. Most HELOCs have variable rates. When the prime rate rises, your HELOC rate rises. When it falls, your rate falls. Variable rates mean your monthly interest bill can change month to month. The uncertainty is the primary risk of a HELOC compared with a fixed-rate home equity loan.
Related terms: Fixed Rate, Prime Rate, Margin