Home equity loan and mortgage types can be bewildering

Equity loans, lines of credit, multi-step and ARMs add to confusion

The choices used to be simple when someone wanted to purchase a home, refinance one or take out a home equity loan -a term loan with a fixed interest rate for a set number of years. For new mortgages, the term was usually 15 or 30 years, for home equity loans, typically five. Those were the choices. Then again, those were the days when down payments needed to be twenty percent of the price and when homes could be purchased using the wages of only one family member. Those days are gone and home prices are up to the point where it can be quite difficult to buy a home without some additional help. The mortgage companies have come to the rescue with a wide variety of loan options that make it possible for nearly everyone to own a home. The downside is that there are so many options, perhaps a hundred, that the selection can be daunting for the uneducated. A wrong or poor choice could cost the would-be homeowner thousands of dollars over the life of the loan.

• The standard 15 and 30 year fixed-rate term mortgages are still quite popular, offering the major benefit of a payment that will remain more or less fixed for the duration of the loan. With interest rates as low as they are now, this option is a good one for either a first mortgage. The low rates make for great home equity loans if you need to consolidate some debt.
• The ARM, or Adjustable Rate Mortgage, is a good choice for those who don’t know how long they will be in their home or for those who need a slightly lower rate in order to afford the home. The rate at the time of signing the mortgage is lower than for a term loan, but the rate can go up or down over the course of the life of the loan. The mortgage specifies how often the rate can adjust, how much the rate can adjust at one time, and how much the rate can adjust over the life of the loan.
• Convertible mortgages are a type of ARM that offer the buyer the opportunity to convert the ARM to a fixed-rate mortgage after a certain amount of time. There is an additional fee for this conversion, but the fee is lower than the cost of a complete refinancing. This type of mortgage offers the best of both an ARM and a term loan.
• A Two Step mortgage is one that has a low rate for the first few years but adjusts to a fixed rate after a period of time specified in the document. This type of loan is great for first-time homeowners who may have difficulty affording a home but who expect their income to rise over time. The downside is that the increase will adjust to then-prevailing rates, and the increase in the payments could be huge, rendering the home unaffordable.

These are but a few of the available types of mortgages on the market today. Each of them has multiple variants, so anyone considering a home equity loan, line of credit, or first mortgage would be well advised to do their research before agreeing to sign.