Home Equity & HELOC Glossary
Home equity borrowing has its own vocabulary, and a single misunderstood term can cost real money. This glossary defines the core concepts behind HELOCs, home equity loans, and cash-out refinancing in plain language — each entry written to stand on its own, so you can understand a term without reading the whole page.
Definitions are arranged alphabetically. Where a term carries a tax, legal, or regulatory rule, the entry cites a primary source. For the full picture on any topic, follow the link from each entry to the relevant in-depth guide.
Acquisition debt
Acquisition debt is a mortgage taken out to buy, build, or substantially improve your home, secured by that home. It matters for taxes: under current IRS rules, interest is generally deductible only on up to $750,000 of combined acquisition debt ($1 million for loans taken before December 16, 2017). HELOC interest qualifies only when the funds improve the home.
Primary source: IRS — Publication 936, Home Mortgage Interest Deduction
Amortization
Amortization is the process of paying off a loan through regular payments that cover both interest and principal, so the balance reaches zero by the end of the term. Early payments are mostly interest; later ones are mostly principal. A HELOC’s repayment period is amortizing, which is why payments often jump after the draw period ends.
Cash-out refinance
A cash-out refinance replaces your existing mortgage with a new, larger one and pays you the difference in cash. Unlike a HELOC or second mortgage, it changes your first mortgage’s rate and terms and has closing costs. For homeowners holding a low first-mortgage rate it can be costly, since the entire balance reprices.
CLTV (combined loan-to-value)
Combined loan-to-value (CLTV) is the total of all loans secured by your home — your first mortgage plus any HELOC or second mortgage — divided by the home’s value. Lenders use it to cap how much equity you can borrow; many allow a CLTV up to about 80–90%, though limits vary by lender and borrower profile.
Draw period
The draw period is the opening phase of a HELOC — commonly about 10 years — when you can borrow against your credit line, repay, and borrow again. Many lenders require only interest payments during this phase. When it ends, you can no longer draw funds and the loan enters its repayment period.
DTI (debt-to-income)
Debt-to-income (DTI) ratio is your total monthly debt payments divided by your gross monthly income, shown as a percentage. Lenders use it to judge whether you can afford new payments. For HELOCs, many lenders look for a DTI at or below about 43%, though some allow up to 50% for strong borrowers.
HELOC vs. home equity loan (HELOAN)
Both are second mortgages that borrow against your equity, but a HELOC is a revolving credit line with a usually variable rate that you draw on as needed, while a home equity loan (HELOAN) is a lump sum at a fixed rate repaid on a set schedule. A HELOC offers flexibility; a HELOAN offers payment certainty.
Home equity / usable equity
Home equity is your home’s current market value minus everything you owe against it. Usable (or tappable) equity is what lenders will actually let you borrow: your home’s value times the lender’s maximum CLTV, minus all your existing liens. Because most CLTV caps sit below 100%, usable equity is typically less than total equity.
Lien position / second lien
Lien position is the order in which lenders get repaid if a home is sold or foreclosed. The first mortgage holds first lien (paid first); a HELOC or home equity loan is usually a second lien, paid only after the first is satisfied. That added risk is why second-lien rates are typically higher.
Margin
The margin is the fixed percentage a lender adds to an index — usually the prime rate — to set your HELOC’s interest rate. If the prime rate is 7% and your margin is 1%, your rate is 8%. The index moves over time, but your margin stays constant for the life of the line.
Ministerial approval (ADU)
Ministerial approval means a government must approve a permit by checking it against fixed, objective standards — no public hearing, discretionary judgment, or environmental review. Under California law, a local agency must approve or deny a complete accessory dwelling unit (ADU) application ministerially within 60 days, which typically speeds up adding an ADU — a common home-equity project.
Primary sources: California Government Code §66323 — ministerial ADU approval California Government Code §66317 — 60-day ADU approval timeline
Prime rate
The prime rate is a benchmark interest rate banks use to price consumer and business lending. It moves with Federal Reserve policy — conventionally set 3 percentage points above the top of the federal funds target range. Most variable-rate HELOCs are priced as prime plus a margin, so HELOC rates generally rise and fall with Fed rate decisions.
Prop 13 basis
Under California’s Proposition 13, a property’s taxable value (its base year value) is set at market value when you buy or build, then can rise no more than 2% per year — not with the market. Property tax is a 1% base rate plus voter-approved local levies. Long-time owners often have a taxable basis far below their home’s real worth.
Primary source: California State Board of Equalization — California Property Tax: An Overview (Publication 29)
Repayment period
The repayment period is a HELOC’s second phase, beginning when the draw period ends — typically lasting 10 to 20 years. You can no longer borrow and instead repay the outstanding balance through amortizing payments of principal plus interest. Because interest-only draws stop, monthly payments commonly rise sharply — the HELOC “payment shock.” Some lines instead require a balloon payoff.
Variable rate
A variable rate is an interest rate that changes over time as an underlying index moves. Most HELOCs carry variable rates tied to the prime rate plus a margin, so your payment can rise or fall as the Fed shifts rates. Some lenders offer fixed-rate options to lock all or part of a balance.