History

• Before the establishment of the Federal Housing Authority in 1934, there were no home equity loans, and most mortgages required borrowers to make down-payments of at least 50 percent. Mortgage insurers including the FHA reduced the exposure of lenders to defaults by borrowers with little or no equity. The 1986 Tax Reform Act eliminated tax deductions for interest on credit cards and banks began offering home equity lines of credit, which worked similarly to credit cards, but still had tax-deductible interest.
  
  

Types

• Conventional mortgages are amortizing loans with terms of 15 or 30 years. Adjustable-Rate-Mortgages have rates that reset after intervals ranging from one month to seven years.
  
  Home Equity Lines are revolving lines of credit that typically have a duration of 20 years, after which balances are turned into amortizing loans. Home equity loans are fixed-rate term-loans that usually last between 10 and 20 years. Some home equity loans offer interest only payments and require a balloon payment of principal at the end of the term.
  
  

Misconceptions

• Many people do not realize that home equity loans and lines are actual mortgages. In addition to the home equity agreement, the closing documents of every equity loan contain a mortgage that is recorded in the local county courthouse. Some people who have HELOCs without a balance do not realize the issuing bank still has a lien on their home. A homeowner has to contact the lender and make a payoff of zero dollars to actually close a home equity line of credit.
  
  

Benefits

• HELOCs cater to people with fluctuating cash flow who frequently have major expenses, but do not keep balances for long. They generally have lower rates and higher line amounts than other types of revolving credit.
  
  Fixed Mortgages and home equity loans cater to people who seek permanent interest rates and steady payments. ARM mortgages enable speculators and people using mortgages for the short term to buy properties inexpensively. Many people are able to deduct interest from mortgages and home loans from their taxable income.
  
  

Warning

• Banks cannot call in mortgages, but they can freeze HELOCs. In areas of the United States where house prices have declined, many banks have reduced customers line amounts. In some instances, they have closed HELOCs due to depreciating values in local markets.
  
  When banks quote the Annual Percentage Rate, the APR on mortgages and fixed loans includes interest, finance charges and points. The APR banks use for HELOCs only includes the interest, because the balance fluctuates with usage.