There are many types of home loans. Largely, home loans fall into two broad categories: 

- Mortgages
- Home equity loans

Home equity loans can include a line of credit, called a Home Equity Line of Credit, or HELOC.

All home loans are offered with two types of interest:

- Fixed interest rate
- Variable interest rate

Mortgages

A mortgage is a loan made to a borrower for the purchase of real estate.

Many aspects of the borrower’s financial picture are evaluated and considered before a mortgage is granted. A mortgage underwriter assesses the following items: 

- The borrower’s credit rating, or FICO score. This demonstrates whether the borrower has been timely about paying debts and obligations in the past. Visit myFICO for information on FICO scores, and find out how to obtain your credit rating. 

- The borrower’s income, relative to current debt load, is also considered. The lending institution needs to ensure that the borrower makes enough to repay the mortgage.

-The amount that a borrower is able to come up with as a down payment may also be a factor in qualifying for a mortgage.

Over time (often a 15 or 30 year period, but a range from 10 to 50 years is also possible), the borrower pays back the principal of the loan, as well as interest.

Mortgage Home Equity

As you pay off your mortgage, you begin to acquire equity in your home. Equity is calculated by subtracting what you owe on your house from what your house is worth. For example: 

- Your home is worth $150,000. 
- Your owe $130,000 on your home.
- Therefore, your equity at that point in time is $20,000.

Equity is important because it ties in with two other types of home loans – the home equity loan and the home equity line of credit. These loans are described below.

Mortgage Default

If you default on your mortgage, your home may be foreclosed. In this case, you can lose your home because the bank takes it.

See HUD for advice on avoiding foreclosure, information on options to foreclosure, and resources for assistance.

Fixed Rate and Adjustable Rate Mortgages

Interest for mortgages is calculated in two ways: 

- Fixed rate mortgages offer one fixed rate of interest over the entire life of the loan. 
- Adjustable rate mortgages (ARMs) may start at a low introductory rate, but the interest rate may adjust during the life of the loan. The amount of the adjustment of the interest rate on an ARM is set forth in the loan documents.

See RealEstateABC.com for links to a variety of mortgage calculators.

Fixed rate mortgages offer advantages and disadvantages: 

- The fixed interest rate guarantees a predictable payment that will not change over the life of the loan. 
- However, if market interest rates fall, the fixed rate mortgage may be locked in at a rate that is too high. In this case, it may be a good idea to refinance. Online refinancing calculators can tell you if refinancing makes sense in your situation. See:

      http://www.locallender.info/consumer-banking/mortgage/refinance-calculator.asp or         http://www.mortgage-calc.com/mortgagerefinancing/mortgage_refinancing.html.

Adjustable rate mortgages come with their own pros and cons: 

- The low introductory rate on these loans (sometimes called a “teaser”) allows people to afford monthly payments for homes that would be impossible to afford with a fixed loan. 

- Alternatively, if interest rates rise, the ARM payment rises and can, in some cases, break the home budget. During the housing crisis of 2007-2008, many homeowners with ARMs lost their homes when they could no longer make payments and their homes decreased in value.

Home Equity Loans

While a mortgage will be the first loan you take to buy your home, a home equity loan may be taken after you have committed to your mortgage.

A home equity loan, as its name implies, is taken against the equity you have built up in your home. A borrower, if qualified, may have a concurrent mortgage and home equity loan.

There are two types of home equity loans: 

- Closed end home equity loans
- Open end home equity loans

Home equity loans may be used for any purpose – renovations to the home, acquiring assets, vacations, etc.

Closed End Home Equity Loans

These loans have the following characteristics: 

- One time loan, paid in one lump sum
- Usually calculated for up to 100% of the value of the home, less any liens (such as the balance on your mortgage) 
- The life of the loan may span 15 years 
- Interest is usually fixed, though some home equity loans have a balloon payment at the end of the loan life

Open End Home Equity Loans

These loans are also known as the home equity line of credit (HELOC). They have the following characteristics: 

- Revolving line of credit 
- Usually calculated for up to 100% of the value of the home, less any liens (such as the balance on your mortgage) 
- Interest is usually variable

Additional Resources 

- Home Loans Calculator:             http://www.homeloanscalculator.org 
- Bankrate Web site:                    http://www.mortgage-calc.com/mortgage/simple.php  
-  FSBO America:                         http://www.fsboamerica.org/introduction-to-mortgages.cfm 
-  The Federal Reserve Board:       http://www.federalreserve.gov/pubs/HomeLine