Home Equity Lending Lingo

The language of lending can be a little off-putting, because most people aren't familiar with the terms. To keep you from stumbling over these concepts, we've defined the most important ones:

Adjustable rate: A mortgage rate that's pegged to a specific economic indicator, such as treasury bills or the prime interest rate.

APR: The annual cost of the loan, including fees, interest, and points, expressed as a percentage.

Collateral or security: The property or asset that secures the debt. If the debt's not paid on time, the lender has the right to foreclose.

Fixed rate: A rate that's set at the time of closing and remains constant throughout the mortgage term.

Foreclosure: When the bank takes possession of a property because the borrower doesn't adhere to the terms of the mortgage agreement.

Loan-to-value ratio or LTV: Expressed as a percentage, this number is the result of the mortgage amount divided by the home's appraised value or selling price, whichever is lower. LTV helps the lender determine how much debt you can comfortably handle. Most lenders are reluctant to lend 100 percent of a home's value, because that leaves them no cushion if property values decline.

Prime rate: A national benchmark interest rate that commercial banks charge their best borrowers, generally large corporations. Some home equity products are priced at a slight margin above or below the prime rate.

Second mortgage: Any loan that's subordinate to a first mortgage.

Term: The length of time that you have to repay your mortgage loan.

Do you have your bearings yet? Hopefully, you're feeling more comfortable about the whole subject of home equity. The next step is to take a closer look at the different types of available equity financing.