HELOC and HEL Glossary: Advanced Terms Defined (2026)

APR (Annual Percentage Rate)

The effective yearly cost of the loan including interest rate plus origination costs spread over the loan term. For HELOCs, APR = Prime + margin, subject to lifetime cap.

AVM (Automated Valuation Model)

Statistical model used to estimate property value without an in-person appraisal. Figure uses AVMs to enable 5-day HELOC funding. AVMs drove automated HELOC freezes in 2008 when they showed declining values.

Break-Even Rate

The average prime rate at which a variable HELOC and a fixed HEL have equal total interest cost over a holding period. If actual average prime stays below break-even, HELOC wins. Above it, HEL wins.

CLTV (Combined Loan-to-Value)

The ratio of all mortgage liens on a property to the property's appraised value. First mortgage ($300k) + HELOC ($50k) on a $400k home = 87.5% CLTV. Most HELOC lenders cap at 80-85% CLTV.

Draw Period

The initial phase of a HELOC during which you can borrow against the credit line. Typically 10 years. During this period, minimum payments are usually interest-only.

DTI (Debt-to-Income Ratio)

Monthly debt obligations divided by gross monthly income. Most HELOC lenders require DTI under 43%. Underwriters count the HELOC payment (or hypothetical payment on undrawn lines) in this calculation.

Fed Funds Rate

The Federal Reserve's target rate for overnight lending between banks. April 2026: 4.00-4.25%. Prime rate = Fed funds + 3.00%. This is the root cause of all HELOC rate movements.

FRLO (Fixed-Rate Lock Option)

A lender feature allowing a portion of a HELOC drawn balance to be converted to a fixed-rate sub-loan at a stated rate and term, without refinancing the entire HELOC. Available at US Bank, Wells Fargo, PNC, TD Bank.

Hard Inquiry

A credit pull that appears on your credit report and can temporarily lower your score 5-10 points. HELOC applications trigger a hard inquiry. Disappears from scoring impact within 12 months.

HELOC (Home Equity Line of Credit)

A revolving credit line secured by a lien on your home. Rate is variable (Prime + margin). Draw period typically 10 years (interest-only payments). Repayment period 10-20 years (P+I).

HEL (Home Equity Loan)

A closed-end, lump-sum loan secured by a lien on your home. Rate is fixed for the term. No revolving access. Similar to a second mortgage in structure.

IRS Publication 936

The IRS document describing the home mortgage interest deduction, including the rules for deductibility of HELOC and HEL interest. Post-TCJA: interest deductible only for home acquisition/improvement use, subject to $750k cap.

IRS Publication 535

The IRS document covering business expenses, including business-interest deductions. Relevant when HELOC proceeds are used for business purposes and the borrower seeks a deduction via Schedule C rather than Schedule A.

Inactivity Fee

A fee charged by some HELOC lenders when no draws are made for a specified period (typically 12-24 months). Amount: $50-$150/year. Not universal. Figure, Aven do not charge this.

Lien

A legal claim on a property as security for a debt. A HELOC creates a second lien on your home (assuming you have a first mortgage). The lender can foreclose if you default on payments.

Lifetime Cap

The maximum APR a HELOC can reach over the life of the loan, typically 18% in the US. Set at origination. Cannot be changed by the lender after origination.

Margin

The fixed spread a lender adds to the prime rate to determine the HELOC APR. Set at origination based on credit score, CLTV, and relationship pricing. Typical range: 0.50-3.50%. Example: prime 7.25% + margin 2.75% = 10.00% APR.

Mortgage Interest Deduction (MID)

The federal income tax deduction for interest paid on mortgage debt used to acquire or improve a primary or secondary residence. Post-TCJA (2017), applies only to acquisition debt up to $750,000. HELOC interest qualifies only for home-improvement use.

Negative Equity

When the market value of a property falls below the total loan balances secured against it. Relevant to HELOC holders: negative equity is one of the conditions that triggers lender freeze clauses.

Origination Fee

A lender fee charged at closing for processing the loan. Many HELOCs have no origination fee (especially digital-first lenders); HELs typically have 0.5-1% origination fees rolled into closing costs.

Payment Shock

The payment increase when a HELOC draw period ends and the borrower transitions from interest-only to full amortised P+I payments. Typically adds 15-35% to the monthly obligation, depending on balance and rates.

Periodic Cap

A limit on how much the HELOC rate can move at any single reset period. Most US HELOCs do NOT have periodic caps, unlike adjustable-rate mortgages. A HELOC without a periodic cap moves by the full Fed funds change at each reset.

Piggyback Loan

A second-lien loan taken simultaneously with a first mortgage, typically to avoid PMI. 80/10/10 structure: 80% first mortgage, 10% piggyback HELOC, 10% down payment.

PMI (Private Mortgage Insurance)

Insurance required by the primary mortgage lender when the down payment is below 20%. Protects the lender, not the borrower. Annual cost 0.5-1.5% of the loan amount. Piggyback HELOCs are used to avoid PMI.

Prime Rate

The benchmark interest rate banks charge their most creditworthy customers. Defined as Fed funds target + 3.00%. April 2026: 7.25-7.50%. HELOC rates reset monthly when prime changes.

Repayment Period

The phase of a HELOC after the draw period ends. No new draws are allowed. Outstanding balance amortises over 10-20 years with equal P+I payments. Payment increases substantially vs draw period.

Revolving Credit

Credit you can draw, repay, and re-draw up to a limit. A HELOC is revolving credit. How it is reported by credit bureaus (revolving vs installment) affects your credit score and utilisation ratio.

Section 163(j)

Internal Revenue Code provision limiting business-interest deductions for larger businesses. Relevant when borrowers use HELOC proceeds for business purposes and attempt to deduct interest on Schedule C or corporate returns.

Second Lien

A mortgage or loan secured by a property that is subordinate to the first mortgage. HELOCs and HELs are typically second liens. In foreclosure, the first lien is paid first; second liens recover from remaining proceeds.

TCJA (Tax Cuts and Jobs Act, 2017)

The federal legislation that restricted mortgage-interest deductibility on HELOCs and HELs to home acquisition/improvement use only (eliminating deductibility for debt consolidation, investing, and other uses). The $750k combined debt cap was also introduced. Extended through 2029 by 2025 legislation.

Tracing (IRS)

The IRS requirement to document that borrowed funds were used for a specific deductible purpose. For HELOC interest deductibility, you must trace proceeds to qualifying home improvements. For business-use deductions, you must trace to business expenses.

Utilisation Ratio

Revolving credit used divided by revolving credit available, expressed as a percentage. If a HELOC is reported as revolving, a $40k draw on a $50k line = 80% utilisation. High utilisation is a significant negative FICO factor.

Variable Rate

An interest rate that changes periodically based on an index. HELOC rates are variable, tied to prime. In contrast, a home equity loan has a fixed rate that does not change after closing.

WSJ Prime Rate

The Wall Street Journal's published version of the prime rate, widely used as the benchmark index for HELOC rate calculations. Defined as the most common federal funds target rate plus 3.00%. Updated daily as the Fed changes rates.