Home Equity Loans: Know the Lingo

Elizabethan philosopher Francis Bacon once said, "Knowledge is power." If you're in the market for a home equity loan, it would be wise to follow his lead and arm yourself with as much information as possible. Here are some important home equity loan terms to know, so you can enter the market as an educated consumer.

A brief dictionary of home equity loans

• APR: The yearly interest rate that you'll actually pay when you include the closing costs, prepaid points, and other loan expenses. It's typically higher than the interest rate, and a truer measure of the actual costs of your loan.
• Bad credit home equity loan: Loans with relaxed approval conditions in exchange for higher interest rates. These loans can help you rebuild a damaged credit history.
• Debt-to-income ratio: The balance on your loans and credit cards, divided by your annual earnings. It's a key measurement of your financial health that lenders use to determine your creditworthiness.
• Draw period: The time when you can draw funds from your home equity line of credit (HELOC) account, followed by a repayment period with no withdrawals.
• Home equity line of credit (HELOC): A second mortgage loan that gives you access to funds as needed. A HELOC acts much like a credit card with very high credit limit. Repayments are based on your withdrawals, rather than the total credit limits.
• Home equity loan: A second mortgage that's secured against your primary residence in addition to your first mortgage. It's disbursed as a lump sum, with fixed monthly repayments on an amortized schedule, just like your first mortgage loan.
• Home equity loan rate: The annual interest rate charged against your home equity loan balance. It can be fixed or adjustable, and is determined by prevailing interest rates as established by the Federal Reserve Board.
• Home improvement loan: The portion of home equity loans used to finance home improvement projects, they're generally tax-deductible. Loans are often marketed under this name to highlight that benefit.

Francis Bacon also said, "The mold of a man's fortune is in his own hands." Now that you know the basics, you can go forth and mold your own fortune by tapping the equity in your home.