Over the years, we’ve shared lots of useful tips about HELOCs: what to use them for, what NOT to use them for, and who should or shouldn’t get one. All helpful information if you’re considering tapping into the equity in your home.
Now we want to make sure you understand all the lingo your lender is using and what all the fine print in your loan paperwork means. Be advised: never, ever sign legal paperwork without a clear idea of what you’re committing to.
For starters, HELOC (pronounced Hee-lock) stands for Home Equity Line of Credit.
It is a line of credit in which the lender agrees to lend a maximum amount within an agreed period of time, where the collateral is the borrower's equity in his/her house.
Here’s a quick look at some of the more common terms associated with a HELOC. (We promise not to use any industry lingo!)
Annual or maintenance fee - a yearly fee for having a HELOC whether you use it or not. Good news - Hanscom doesn’t charge anything.
Application fee - a fee charged when you apply for the loan. It may include the costs of a property appraisal and credit report. Some lenders may hide these fees by charging a higher interest rate.
Balloon payment - a big payment that’s due at the end of your loan term because the total amount owed was not spread out evenly over the life of the loan. Most borrowers refinance before this payment is due. If your loan has a balloon payment, you’ll start with much smaller-than-usual monthly payments.
Closing costs - paid when you close on the loan. They may include title insurance, attorney’s fees, recording fees, estimated costs of property taxes and insurance, and credit report fees. You’ll be given an estimate of these costs shortly after you apply for the loan. You’ll probably have to bring a cashier’s or certified check to your closing to pay them.
Equity - the difference between the market value of your home and what you owe on your mortgage (plus any existing HELOCs or second mortgages). To keep your home safe, never use all the equity you have.
Points - your lender may charge points when you take out a loan. A point is equal to 1% of the amount you’re borrowing. For example, if you borrow $200,000, one point is $2,000. Many lenders don’t charge points - find one of them if you can!
Transaction fees - charged each time you borrow money, request a balance transfer or take a cash advance. Some lenders don’t charge any!
Variable rate - an interest rate that changes periodically, generally every 6 or 12 months. If the rate goes up, the amount of your monthly payment will, too. This can be a positive or a negative, depending on your starting rate.
Got any other terms you’re not quite sure of? Don’t be afraid to ask. Remember that knowledge is power!