Here are some of the loans available to borrowers:
* Interest-only mortgages, also called deferred amortization loans. The monthly payment covers only the interest owed on the loan, usually for the first five to 10 years of the loan term. Nothing has to be paid toward the total amount borrowed, the principal. After the interest-only period ends, the payment jumps to cover both the interest owed and the principal, and the interest rate adjusts based on a particular index.
* Interest-only fixed-rate mortgages. These are one of the newest types of loan. In this case, the payment jumps after the interest-only period ends to include the principal owed, but the interest rate does not change. Maryland's Department of Housing and Community Development, for instance, offers a 35-year fixed-rate mortgage to eligible low- and moderate-income families with the first five years interest-only. The Virginia Housing Development Authority offers a 30-year fixed-rate mortgage with the first seven years interest-only.
* Option payment adjustable-rate mortgages, or option ARMs. These short-term mortgages can run for a month before adjusting to a new interest rate or for one, three, five, seven or 10 years. They typically have low introductory interest rates, often as little as 1 percent, and allow borrowers to set their own payment terms.
For example, a borrower could:
1. Make a minimum payment lower than the amount needed to cover the interest, which would increase the total amount borrowed. A borrower could then owe more than the house is worth.
2. Pay only interest, deferring payment of the principal
3. Make payments calculated to pay off the loan over 15 or 30 years.
* 40-year mortgages. Now that Fannie Mae has said it will buy these products, more lenders are offering them. The loan has been around since the 1980s, when double-digit interest rates rather than soaring home prices made it hard for first-time buyers to get a foot in the door.
A borrower has 40 years to pay off the loan, instead of the traditional 30. Lengthening the term cuts the monthly payment a bit, but the loan carries a slightly higher interest rate than a 30-year loan.
The borrower pays off the principal more slowly, and thus builds equity more slowly, and pays much more interest over the life of the loan.
* 20-20 mortgages. This variation on a 40-year loan was introduced by Hingham Institution for Savings in Hingham, Mass., a year ago and has drawn a strong response from borrowers in pricey communities outside Boston, including Cape Cod, Nantucket and Martha's Vineyard. This could lead to similar products in other regions with huge price gains, but the Hingham bank makes loans only for properties in Massachusetts.
The loan runs 40 years, but adjusts to a new interest rate after 20. The initial interest rate is slightly lower than a traditional 30-year loan because the product is almost the same as taking out two 20-year loans.
-- Sandra Fleishman