Glossary of terms related to home equity loans

[Mar 5, 2011.]

 

Following is a list of terms along with an explanation of their meaning. The list will help you understand any conversations you may have with a home loan lender. It can also serve as a good reference when you sit down to fill out your loan application paperwork.

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Amortized - This term relates to the amount of principal balance you pay down when you make your loan payments. A fully amortized loan pays the balance in full by the last payment made in the loan term. A loan that is not fully amortized will likely have a balloon payment due at some point.

APR - Annual Percentage Rate or APR alerts the borrower of the cost of borrowing the money expressed as a percentage number. APR is different from the interest rate on the Note because it also includes things like fees and broker commissions. The APR does not affect your monthly payments, its purpose is to give your perspective on how much the loan costs.

ARM - An adjustable rate mortgage or ARM has an interest rate that is not fixed but can change. Know your index, margin and loan caps well before signing this type of loan agreement.

Index - An index is used to calculate the monthly payments on an adjustable rate mortgage (ARM). Many home equity loans are ARMs.

Interest Rate Caps - Caps are very important on an ARM. They reduce the borrower's risk by putting limits on how much the interest rate can change at any one time. The life cap is the maximum the interest rate can go up.

Loan Agreement - (see Note)

Margin - A margin is the percent over the index that the lender requires for lending the money. The margin covers the lender expenses and profit.

Note - The Note is also sometimes called the Loan Agreement. This is the document where you can find out about the interest you are required to pay, as well as when your payments are due. If there is any kind of prepayment penalty, it would most likely be written in the Note.

Prime Rate - If the home equity loans you research have an adjustable interest rate, chances are they will be based on the Prime Rate index. Prime Rate has historically been about three percent above the Fed Funds Rate, which is the rate the Federal Reserve uses to affect US monitary policy. Prime Rate is thought to be very stable. It has been at about 3.25 percent since December 16, 2008.

Term of the Loan - The "term" is the life of the loan, or the length of time the lender is giving you to repay the money in full. Terms can range from a few years to up to forty. On average, home equity loans have either fifteen year or thirty year terms. In some cases, the payments are amortized for thirty years, but the term is only fifteen years, which would mean a big balloon payment due at the end.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.