Home Equity Glossary: 33 Terms Explained (2026)
Plain-language definitions with context. Each term links to the page where it is covered in depth.
APR (Annual Percentage Rate)
The total annual cost of a loan expressed as a percentage of the loan amount, including interest rate and fees. Use APR (not just rate) to compare offers: a 7.25% rate with $2,000 in fees may have a higher APR than a 7.50% rate with no fees, especially on a short time horizon.
Amortisation
The process of paying off a loan through regular equal payments that cover both principal and interest over a set term. In the early years, most of each payment goes to interest; in later years, more goes to principal. HEL payments are fully amortising from month one. HELOC payments during the draw period are interest-only (not amortising).
CLTV (Combined Loan-to-Value)
The ratio of all secured debt on a property to its current value. Example: $300k first mortgage + $80k HELOC on a $500k home = 76% CLTV. Most HEL/HELOC lenders cap at 85% CLTV, meaning total secured debt cannot exceed 85% of home value. Some lenders (SoFi) go to 90%.
Closing Costs
Fees paid at loan closing to cover appraisal, title search, title insurance, origination, attorney, recording, and other administrative costs. HEL closing costs typically run 2-5% of the loan amount. HELOCs often advertise zero closing costs but may charge a first-draw origination fee instead.
Draw Period
The phase of a HELOC during which you can borrow, repay, and re-borrow up to your credit limit. Typically 5-10 years. During the draw period, minimum payments are interest-only on the drawn balance. When the draw period ends, the line closes and repayment begins.
DTI (Debt-to-Income Ratio)
Your total monthly debt payments divided by your gross monthly income, expressed as a percentage. Most HEL/HELOC lenders cap DTI at 43%. A lower DTI improves your approval odds and rate. Example: $3,000/mo in debt payments on $7,500/mo gross income = 40% DTI.
Equity
The difference between your home's current market value and the outstanding balance of all liens (mortgages, HELs, etc.) secured by it. Example: $550k home value - $280k mortgage = $270k equity. Most lenders will let you borrow up to 85% of your home value minus the first mortgage balance.
Fed Funds Rate
The target interest rate set by the Federal Reserve for overnight interbank lending. As of April 2026, the target range is 3.50-3.75%. Prime rate equals the fed funds upper bound plus approximately 3%, so prime is 6.75%. HELOC rates are directly affected by Fed decisions.
Fixed Rate
An interest rate that does not change for the life of the loan. Home equity loans have fixed rates. The certainty of knowing your payment will never increase is the primary reason to choose a HEL over a HELOC in 2026.
FICO Score
The most widely used credit scoring model from Fair Isaac Corporation. Ranges 300-850. Most HEL/HELOC lenders require minimum 620 (Discover), with prime rates at 740+. FICO 8, FICO 9, and FICO 10 all treat HEL as installment debt; they generally treat HELOC as installment too, though lenders may report differently.
Floor Rate
The minimum interest rate a variable-rate loan (typically a HELOC) can reach, regardless of how low the prime rate falls. Typical floors: 3.99-4.99% or the origination rate. Limits your benefit from Fed rate cuts. Always confirm the floor with your lender before signing.
Hard Inquiry
A credit check initiated when you apply for new credit that appears on your credit report and temporarily affects your score (typically 5-10 points). Multiple HEL/HELOC inquiries within a 14-45 day window (depending on FICO version) are counted as a single inquiry for scoring purposes.
HEL (Home Equity Loan)
A lump-sum second mortgage with a fixed interest rate and fixed monthly payments. You receive the full amount at closing, repay over 5-30 years, and the rate never changes. Also called a second mortgage or home equity installment loan.
HELOC (Home Equity Line of Credit)
A revolving credit line secured by home equity with a variable interest rate tied to prime. You draw as needed during a draw period (5-10 years, interest-only minimum payments), then repay the balance over a repayment period (10-20 years, P+I payments). Rate changes with prime.
Home Equity
The portion of your home's value that you own outright -- current market value minus all secured debt. Equity grows as you pay down your mortgage and as the home appreciates. Most lenders require 15-20% equity (80-85% CLTV) to qualify for a HEL or HELOC.
Installment Debt
Debt with a fixed payment schedule and term, like a car loan or home equity loan. Credit bureaus report HELs as installment debt. Installment debt does not count against your revolving utilisation ratio, so a HEL has less impact on your credit score than a credit card with the same balance.
Interest-Only Payment
A payment that covers only the interest accrued on the balance, with no principal reduction. HELOC minimum payments during the draw period are interest-only. The risk: if you make only minimum payments for 10 years, your balance is unchanged at repayment start and your payment jumps significantly.
LTV (Loan-to-Value)
The ratio of a single loan balance to the property's current value. A $280k mortgage on a $500k home is 56% LTV. CLTV (combined LTV) includes all liens. Lenders use CLTV for HEL/HELOC approvals.
Lifetime Cap
The maximum interest rate a variable-rate loan can reach over its entire life. Most state laws cap HELOCs at 18% APR. Some lenders have a lower contractual cap. Confirm the lifetime cap before signing any variable-rate loan agreement.
Margin
The fixed percentage added to the prime rate to calculate your HELOC's APR. Set at origination and does not change for the life of the line. Example: prime 6.75% + margin 0.50% = 7.25% HELOC rate. A lower margin means a lower rate whenever prime is. Margins are often negotiable.
OBBBA (One Big Beautiful Bill Act)
Legislation signed in 2025 that made the TCJA's home equity interest deduction restrictions permanent. Before OBBBA, the TCJA limits (home-improvement-only deduction, $750k debt cap) were set to sunset after 2025. OBBBA eliminated the sunset. Pre-2018 broader deduction rules are not returning.
Origination Fee
An upfront fee charged by the lender for processing and underwriting the loan, often expressed as a percentage of the loan amount. For Figure and Aven HELOCs, this is the first-draw fee (4.99% and 4.9% respectively). Traditional lenders may charge 0.5-1.5% or a flat fee. Always factor origination into your total cost comparison.
Payment Shock
The sudden increase in monthly payments when a HELOC's draw period ends and repayment begins. On a $50,000 HELOC at 8.50%, the payment jumps from $354/mo (interest-only draw) to $492/mo (15-year P+I repayment) -- a 39% increase. Rate increases compound the shock.
Prepayment Penalty
A fee charged if you pay off a loan before the end of its term. Most HEL lenders have no prepayment penalty. Some credit unions charge 1-3% within the first 24-36 months. HELOC early closure fees (not the same as prepayment) apply when you close the account, typically within the first 3 years.
Prime Rate
The benchmark interest rate used by major commercial banks, historically set at the federal funds rate upper bound plus approximately 3%. As of April 17, 2026, prime is 6.75%. HELOC rates are calculated as prime + margin. When the Fed moves rates, prime moves, and your HELOC rate adjusts at the next billing cycle.
Qualified Residence Interest
Interest on debt used to buy, build, or substantially improve a qualified residence (primary or second home) that is deductible on Schedule A per IRS Pub 936. Subject to the $750k combined debt cap and the requirement to itemise. Debt used for non-qualifying purposes (consolidation, tuition, etc.) does not produce qualified residence interest.
Repayment Period
The phase of a HELOC that follows the draw period, during which the outstanding balance fully amortises over 10-20 years with principal-and-interest payments. The draw period ends, no new draws are permitted, and the remaining balance converts to a fixed-term amortising loan at the then-current variable rate.
Revolving Debt
Debt with no fixed repayment schedule that can be borrowed, repaid, and re-borrowed up to a credit limit. Credit cards are the most common example. HELOCs function like revolving debt during the draw period. Under FICO scoring, HELOCs are generally classified as installment (not revolving), but VantageScore may treat them as revolving.
Second Lien
A loan secured by a property that has a lower priority claim than the first mortgage in the event of default. HELs and HELOCs are second liens (unless there is no first mortgage). In foreclosure, the first lien holder is paid first from sale proceeds; the second lien holder receives the remainder, if any.
Substantial Improvement
Per IRS Publication 936, an improvement that adds to the value of your home, prolongs its useful life, or adapts it to new uses. Qualifying examples: new HVAC, addition, kitchen remodel, new roof. Non-qualifying: routine repairs, painting touch-ups, appliance maintenance. Only substantial improvements make HEL/HELOC interest tax-deductible.
TCJA (Tax Cuts and Jobs Act)
The 2017 federal tax legislation that changed home equity interest deduction rules: restricted deductibility to proceeds used to buy, build, or substantially improve the securing home, and imposed the $750k combined debt cap. These restrictions were made permanent by the OBBBA in 2025.
Title Insurance (Lender Policy)
Insurance that protects the lender against defects in the property's title (ownership chain errors, outstanding liens, fraud) discovered after closing. Required by most HEL/HELOC lenders. Owner's title insurance (protecting you) is separate and optional, but recommended. Cost: typically $100-600 for a lender policy on a HEL/HELOC.
Variable Rate
An interest rate that changes periodically based on a reference rate (for HELOCs: prime rate). Your HELOC rate = prime + margin. When prime rises, your rate and payment rise. When prime falls, your rate falls (subject to any rate floor). Variable rates provide potential savings but introduce payment uncertainty.