Home equity terms, defined in one breath each

Twenty-eight home equity terms, alphabetized. Each one is defined in a sentence or three and points you to the guide that uses it. If a word comes up on a call with us that is not here, ask, and we will add it.

Amortization

Paying a loan down on a fixed schedule where each payment covers that month's interest and a slice of the balance, so the loan reaches zero on the last payment. A fixed-rate home equity loan amortizes from day one; a HELOC usually starts amortizing only when the repayment period begins. See how a home equity loan works.

Appraisal

A licensed appraiser's written opinion of what your home is worth, based on an inspection and recent nearby sales. The lender uses this number, not a listing-site estimate, to figure out how much equity you can borrow against. See HELOC requirements.

APR

Annual percentage rate. The interest rate plus certain fees, expressed as one yearly percentage so you can compare the true cost of two loans. On a HELOC the APR is based on the variable rate at the time of the quote and will move with it. See the comparison.

Cash-out refinance

A brand-new first mortgage that is larger than your current one; it pays off the old loan and hands you the difference in cash. Unlike a second mortgage, it replaces your existing rate, which is why most people with a low first mortgage leave it alone. See equity without refinancing.

Closing costs

The fees to put a loan on the books: appraisal or valuation, title, recording, lender and settlement charges. Second mortgages generally cost less to close than a refinance because the loan is smaller and the first mortgage is left untouched. See the comparison.

Combined loan-to-value (CLTV)

Your first mortgage balance plus the new second mortgage, divided by the home's value. Lenders cap this number, so the room between your current balance and the cap is the most you can borrow. See how to pull equity out of your home.

Debt service coverage ratio (DSCR)

A rental property's gross monthly rent divided by its full monthly payment, including the new loan. It measures whether the property pays for itself, which is why a DSCR loan can qualify on the rent instead of your personal income. See DSCR second mortgage.

Debt-to-income ratio (DTI)

Your total monthly debt payments, including the new loan, divided by your gross monthly income. It is how a lender checks that the new payment fits alongside everything else you owe; each lender sets its own ceiling. See home equity loan requirements.

Draw period

The first stretch of a HELOC, commonly 10 years, when you can borrow, repay and borrow again up to the credit limit. Payments during the draw are often interest-only, so the balance does not shrink unless you pay extra. See how a HELOC works.

Equity

What your home is worth minus what you owe on it. It grows as you pay the mortgage down and as the home's value rises, and it is the thing every product on this site borrows against. See how to pull equity out of your home.

Fixed rate

An interest rate that is set at closing and never changes for the life of the loan, so the payment is the same every month. Home equity loans are commonly fixed; some HELOCs let you lock a fixed rate on a specific draw. See how a home equity loan works.

HELOAN

Short for home equity loan. A lump-sum second mortgage, commonly at a fixed rate, repaid in equal monthly payments over a set term. The acronym exists mostly so people stop confusing it with a HELOC. See how a home equity loan works.

HELOC

Home equity line of credit. A revolving second mortgage with a draw period and a repayment period, usually at a variable rate tied to the prime rate plus a margin. You borrow what you need when you need it and pay interest only on the balance you carry. See how a HELOC works.

Home equity loan

A second mortgage paid out as one lump sum and repaid on a fixed schedule, commonly at a fixed rate over 10 to 30 years. The first mortgage stays in place. Same thing as a HELOAN. See how a home equity loan works.

Index

The published benchmark a variable-rate loan follows. For most HELOCs the index is the prime rate, and your rate equals that index plus the lender's margin. See how a HELOC works.

Interest-only payment

A payment that covers only the month's interest and none of the balance. Many HELOCs allow it during the draw period, which keeps the payment low but leaves the balance exactly where it was. See how a HELOC works.

Lien

A legal claim on your home that secures a debt. Your first mortgage is the first lien; a HELOC or home equity loan is a second lien, which means it gets paid after the first if the home is ever sold or foreclosed. See equity without refinancing.

Loan-to-value (LTV)

One loan's balance divided by the home's value. For a first mortgage this is the standard measure; once a second mortgage enters the picture, lenders switch to combined loan-to-value, which counts both. See how to pull equity out of your home.

Margin

The fixed number of percentage points the lender adds to the index to get your HELOC rate. The index moves; the margin is set at closing and stays put. See how a HELOC works.

Non-owner-occupied

A property the borrower does not live in, such as a rental. Lenders treat it as higher risk, apply tighter limits, and in many cases require a business-purpose loan such as a DSCR second. See DSCR second mortgage.

PITIA

Principal, interest, taxes, insurance and association dues, meaning the full monthly cost of owning the property rather than just the loan payment. It is the denominator in a DSCR calculation. See DSCR second mortgage.

Prime rate

The benchmark rate banks publish for their most creditworthy customers, which moves with the Federal Reserve's short-term rate. It is the index most HELOCs are built on, so when prime changes, HELOC rates change with it. See how a HELOC works.

Rate cap

The ceiling on how high a variable rate can go, set in the HELOC agreement as a lifetime maximum and sometimes a per-adjustment limit as well. It is the one number that tells you the worst case. See how a HELOC works.

Repayment period

The second stretch of a HELOC, commonly 10 to 20 years, when borrowing stops and the balance is paid down with principal-and-interest payments. The payment usually jumps at this point, which catches people who only ever paid interest. See how a HELOC works.

Second mortgage

Any loan secured by your home that sits behind the first mortgage. HELOCs, home equity loans, bank statement seconds and DSCR seconds are all second mortgages; a cash-out refinance is not. See equity without refinancing.

Tappable equity

The equity you can actually borrow, which is the home's value times the lender's CLTV cap, minus what you already owe. It is smaller than total equity because no lender lets you borrow down to zero. See how to pull equity out of your home.

Underwriting

The lender's review of your credit, income, equity and property to decide whether to approve the loan and on what terms. It is where the documents you gathered get read and the real answer gets made. See HELOC requirements.

Variable rate

An interest rate that moves over the life of the loan because it is tied to an index. Most HELOCs carry one, which means the payment can rise or fall from month to month within the rate cap. See how a HELOC works.

Still have a word you cannot place? The Calculators FAQ answers the questions behind most of them, and the bank statement home equity loan page explains how self-employed income is counted.