Beyond standard fixed-rate mortgages, the lending landscape includes many specialized products. A line of credit differs from a loan in that it provides a borrowing limit the borrower can draw from as needed, charging interest only on the amount drawn and offering greater flexibility. A HELOC, or Home Equity Line of Credit, is a revolving credit line secured by home equity that typically functions like a credit card with a draw period of about 10 years, during which the borrower usually pays interest only on the amount borrowed. After the draw period, the HELOC enters a repayment phase of roughly 10 to 20 years, during which no further draws are allowed and payments become fully amortizing until the balance is retired. Interest-only loans require payments covering only interest for a set period (typically 5 to 10 years), after which payments jump to a fully amortizing level, often causing significant payment shock.
Some products can result in negative amortization, where monthly payments are smaller than the interest accruing, so the unpaid interest is added to the principal balance and the loan balance grows over time despite the borrower making payments. Option ARMs allow borrowers to choose among several monthly payment options, including minimum, interest-only, 30-year amortizing, or 15-year amortizing; choosing the minimum payment often triggers negative amortization. Graduated payment mortgages start with lower-than-normal payments that gradually increase for several years before leveling off to a fully amortizing level, a structure that can also produce negative amortization in the early years. Growing equity mortgages, by contrast, keep monthly payments constant but allocate a portion directly to principal reduction, accelerating equity buildup relative to a standard fixed-rate loan. Shared appreciation mortgages offer a below-market interest rate in exchange for sharing a percentage of the home's future appreciation with the lender, lowering monthly payments but exposing the borrower to a share of any property value gains.
Other specialized structures address specific life events or borrower needs. A reverse mortgage allows homeowners aged 62 and older to convert home equity into cash, with the lender paying the borrower and the loan balance growing over time until the borrower sells, moves out, or passes away. A construction loan is a short-term loan financing the building of a home, typically converting into a permanent mortgage once construction is complete, with funds disbursed in stages as milestones are met. A bridge loan is a short-term loan, usually 6 to 12 months, that bridges the gap between buying a new home and selling an existing one, using the current home's equity as collateral. Payday loans are short-term, high-cost loans secured by the borrower's next paycheck, with APRs that can exceed 400% because fees are flat per \$100 borrowed over a two-week period. Margin loans are made by brokerages using the borrower's investment portfolio as collateral; rates are typically low, but if the portfolio value drops below a threshold, the broker can issue a margin call requiring additional funds.
Credit card debt is its own category: cards typically compound interest daily on the average daily balance at variable rates of 20% to 30%, with no amortization schedule and no fixed payoff date. A balance transfer moves high-interest credit card debt to a new card offering a lower introductory APR, often 0% for 12 to 21 months, but transfer fees of 3% to 5% and post-promotional rates affect the true cost. A piggyback loan, sometimes called an 80-10-10, combines a first mortgage at 80% LTV, a second mortgage or HELOC at 10% LTV, and a 10% down payment, allowing the borrower to avoid PMI on the primary loan. Prepayment penalties are fees charged to borrowers who pay off a loan early; soft penalties apply only when refinancing, while hard penalties also apply on sale, and are largely prohibited on most residential mortgages. Add-on interest computes interest once on the full original principal for the entire loan term and adds it to principal before dividing into equal payments, producing a much higher effective rate than the stated rate suggests. Deferred interest accrues during a promotional period and is added to the principal if the balance is not paid in full by the deadline, dramatically raising the true cost of "no interest" offers. Behind the scenes, mortgage-backed securities pool many mortgages and sell shares of the cash flows to investors, increasing liquidity in the mortgage market and playing a central role in the 2008 financial crisis. Fannie Mae and Freddie Mac, government-sponsored enterprises, buy mortgages from lenders, package them into MBS, set conforming loan standards, and provide liquidity to the mortgage market. A sinking fund is similar to an escrow account in that periodic deposits accumulate to pay a future obligation, such as a bond maturity.