Home Equity Loan Glossary




Here are some useful description of terms widely used when dealing with home equity loans. These definitions are directly from the Federal Reserve Board.

Annual membership or maintenance fee - An annual charge for having the line of credit available. Charged regardless of whether or not the line is used.

Annual percentage rate (APR) - The cost of credit on a yearly basis expressed as a percentage.

Application fee - Fees that are paid upon application. May include charges for property appraisal and a credit report.

Balloon payment - A lump-sum payment that may be required when the plan ends.

Cap - A limit on how much the variable interest rate may increase during the life of the plan.

Cash Out Refinancing - Is a method of refinanancing a home for more than the amount owed on the original mortgage. The amount difference between the new and the existing mortgage is considered a home equity loan.

Closing costs - Fees paid at closing, including attorneys fees, fees for preparing and filing a mortgage, fees for title search, taxes, and insurance.

Credit limit - The maximum amount that may be borrowed under the home equity plan.

Equity - The difference between the fair market value (appraised value) of the home and the outstanding mortgage balance.

Index - Published rate that serves as a base for the interest rate charged on a home equity line and also as the base for rate changes used by the lender.

Interest rate - The periodic charge, expressed as a percentage, for use of credit.

Margin - The number of percentage points the lender adds to the index rate to determine the annual percentage rate.

Minimum payment - The minimum amount that you must pay (usually monthly) on your account. Under some plans, the minimum payment may cover interest only; under others, it may include both principal and interest.

Points - One point is equal to 1 percent of the amount of the credit line. Points must usually be paid at closing and are in addition to monthly interest.

Security interest - An interest that a lender takes in the borrower's property to ensure repayment of a debt.

Transaction fee - A fee charged each time you draw on your credit line.

Variable rate - An interest rate that changes periodically in relation to an index. Payments may increase or decrease accordingly.

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