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Home equity loans: Terms to understand before applying

[Dec 19, 2010.]

 

Glossary of Home Equity Loan Terms

Apply for a new home equity loan now.

Equity - Equity is the portion of your home that you own, the percentage free from mortgage loans. If the value of your house is $100,000 and you owe the bank $50,000, you have $50,000 in equity. The more equity you have, the less risk for the lender and the better the interest rate you will pay for your home equity loan.

Fixed Seconds - Most home equity loans are adjustable rateĀ lines of credit that you can use, pay, and re-use. The alternative to the line of credit is a second mortgage with a fixed intereste rate and term for repayment. Lenders often refer to this type of home equity loan as a "fixed second."

Fully indexed rate - The index plus the margin is called the fully indexed rate. The fully indexed rate is used to calculate the monthly payment on adjustable rate home equity loans.

Index - The index is the adjustable portion of the fully indexed rate. Indexes, or indices, are interest rates affected by economic, market forces. As the economy grows or contracts, indices rise and fall.

Interest-only payments - For a period of years, usually 5 or 10, home equity loans and home equity lines of credit may have an interest-only payment option. Interest-only payments are lower than amortized payments because there is no principal reduction portion. Low interest rates, and low interest-only payments, make home equity loans very cheap loans.

Junior liens - Mortgage loans are recorded against your property in order. A 1st mortgage (a loan in 1st position) will be paid 1st in the event of foreclosure. Junior liens are those recorded against the property after the 1st mortgage. Second mortgages, third mortgage, etc. are junior liens.

LTV - Loan-to-value ratio (LTV) will affect the margin the lender offers you. The closer you are to maxing out your house's equity (loan= 100% of value or more), the higher the risk to the lender. The higher the risk, the higher the margin percentage.

Margin - The margin is the portion of profit the lender makes for letting you borrow the money. It is a set percentage over the index. Whereas the index changes with the economy, the margin is set. If the index is 3.25% and the margin is 1.0%, the interest due would be calculated on 4.25%.

Note - The terms of your home equity loans will be identified in your Note. Before your loan is funded, you and the lender will agree on the interest due and other factors of your loan. The Note is signed and notarized, then recorded against the property using a deed.

Prime Rate - Home equity lines of credit are normally adjustable rate mortgages (ARMs) based on Prime Rate as an index. Prime Rate is currently 3.25% and has been since December 16, 2008. For the last two years, the Federal Reserve has kept interest rates very low to stimulate the economy. This has make home equity loans very cheap loans.

 

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.

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