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Words
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 history - a record of the relationship
with current and past debtors.
Credit limit - The maximum amount that
may be borrowed under the home equity plan.
Credit Report - a formal document issued
by credit reporting agencies.
Debt-to-Income ratio - a calculation of
income against the monthly payments made to creditors.
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.
Loan-to-Value (LTV) ratio - a calculation
of the amount of the loan versus the actual value of the home.
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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