Using Your Home Equity

A home equity line of credit (HELOC) allows you to borrow money by using your home's equity as collateral. Your lender sets a borrowing limit, and you can choose to borrow as much of that as you want for an agreed-upon period of time. It’s like a credit card or any other line of credit—you withdraw money as you need it, and you only pay for what you borrow.

A rate and term refinance, also known as a traditional refinance, allows you to change your interest rate, your loan length, or both. The refinance creates a new mortgage that pays off your existing mortgage.

A cash-out refinance will happen when you replace an existing home loan by refinancing with a new, larger loan. By borrowing more than you currently owe, the lender provides cash that you can use for anything you want. In most cases, the “cash” comes in the form of a check or wire transfer to your bank account.

PITI is an acronym that stands for "principal, interest, taxes, and insurance." Those four things make up most homeowners’ monthly housing payments.

An annual percentage rate (APR) is the interest rate you pay each year on a loan, credit card, or other line of credit. It’s represented as a percentage of the total balance you have to pay.

A real estate appraisal establishes a property's market value—the likely sales price it would bring if offered in an open and competitive real estate market. Lenders require appraisals when buyers use their homes as security for their mortgages.

Mortgage brokers are professionals who are paid a fee to bring together lenders and borrowers. They usually work with dozens or even hundreds of lenders, not as employees, but as freelance agents.

Closing costs include payments to a variety of people and organizations for services during the homebuying process. Standard closing costs might range from 2%-5% of your loan. But that depends on where you live, the property you’re buying, and other factors.

Home equity is the portion of your property that you truly “own.” Your lender has an interest in the property until you pay off your mortgage, although you’re still considered to be the homeowner.

A debt-to-income ratio is a measurement of your monthly income compared to your debt payments. Lenders often use this ratio to determine your creditworthiness.

A loan-to-value (LTV) ratio compares the amount of a loan you're hoping to borrow against the appraised value of the property you want to buy. Lenders use LTVs to determine how risky a loan is and whether they'll approve or deny it.

A reverse mortgage is a popular option for homeowners age 62 or older who wish to draw equity from their home to supplement their income without making mortgage payments. Reverse mortgages sponsored by the U.S. Department of Housing and Urban Development (HUD), known as Home Equity Conversion Mortgages, can be used for any purpose.